Interest rates Australia: Home loan solution easing rate rise pain

Lenders and borrowers are taking a fresh approach to home loans that can soften the landing of skyrocketing interest rates.

Lenders and borrowers are taking a fresh approach to home loans that can soften the landing of skyrocketing interest rates.

Most fixed home loans in Australia last between one and five years before reverting to a variable interest rate.

Given the high volumes of borrowers who took advantage of the RBA-funded low fixed rates heyday during the pandemic, the upcoming shift to a variable rate is not surprisingly attracting daily headlines as observers await what has been dubbed the “mortgage cliff”.

Many of the 800,000 borrowers in the transition are actively pursuing lower rates at their bank or with rival lenders, but another solution that might soften the landing will be borrowers taking extended mortgages.

And lenders are beginning to embrace the concept.

It was briefly on show as a form of relief at the height of the pandemic after borrowers with $7.4 billion worth of home loans secured initial temporary repayment deferrals.

Could you still be paying off your home loan in your 80s? Picture: Steve Pohlner

And it is back on the table as the housing market grapples with the nine recent rate rises, along with the ongoing vexed issue of property affordability.

Australian mortgages have typically moved from 25 years over recent decades to sit at 30 years.

But the National Australia Bank subsidiary Ubank recently advised it would offer its 35 year mortgage – previously for new buyers – to those currently needing to refinance.

There’s even a few non-bank lenders offering 40-year options such as Pepper, Australian Mutual and RACQ Bank, mostly designed for borrowers with less than ideal credit ratings. These long mortgages obviously help to keep repayments lower, but the debt and the interest payments will be around for longer, taking the loans into retirement.

RateCity calculated on a $400,000 five per cent rate for 30 years there’d be $773,000 in total payments, which jumps to $925,000 over 40 years.

Lenders take into consideration the profession and retirement age when assessing borrowers.

Australia is following the overseas experience, as life expectancy rises and people retire later.

Recently China saw lenders offering mortgages for borrowers who will be as old as 80, with 50-year-olds eligible for a 30-year mortgage. It’s been reported as a bid to stimulate the market.

Over 70s in the United Kingdom can be eligible for a short-term loan depending on their work or pension income, along with the amount of equity they have in their home. Some lending is up to the age of 85.

For a short time in the late 1980s property bubble, Japanese lenders were offering mortgages lasting 100 years, but it was at a time when buying and flipping Japanese real estate was seen as the way to get rich.

Currently almost one in 10 Australian borrowers are still paying off a mortgage over 65 years, up on the three per cent in 2001. And among the 55 to 64-year-olds, the proportion sits at 36 per cent, up from 15 per cent, says the 2001 and 2021 Census data.

It suggests debt-free home ownership in retirement will be another Australian property dream.