‘Last resort’: Hidden $300,000 mortgage cost to 35-year mortgages

In response to soaring interest rates, a slew of banks now offer 40-year mortgages – but experts warn there’s a $300,000 hidden cost.

As soaring interest rates force the average Aussie to front up an extra $12,000 a year in mortgage repayments, a slew of banks have begun to roll out super-long-term mortgages, claiming they will help to alleviate some of the pressure.

The new offerings, which invite borrowers to take on a mortgage for a 35- or 40-year term, promise to slash the cost of monthly repayments by a few hundred dollars.

But there’s a catch – the lengthier term means borrowers will have to fork out up to $300,000 in extra interest over the course of the loan.

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The extra-long mortgages may look tempting, but experts warn they could bring hundreds of thousands in extra costs.

Ubank, a subsidiary of NAB, extended its offering on super-long terms on Monday – a day before the Reserve Bank’s latest rate rise – allowing customers with an existing home loan to refinance to a 35-year term.

Analysis from Australian financial comparison researcher Canstar showed the average Ubank borrower with a $500,000 mortgage and 25 years left to pay it could slash their repayments by $774 per month.

But, they would end up paying an extra $66,660 in interest.

Scott Phillips, chief investment officer at The Motley Fool, slammed the 35- and 40-year offerings as “dystopian”.

“A 35-year mortgage. Let that sink in. When I bought my first unit, the max length was 25 years,” Mr Phillips tweeted in response to coverage of Ubank’s announcement.

“A 40 per cent increase in duration in a couple of decades. And a huge additional interest burden. Exhibit #3522 in ‘Housing policy in Australia is broken’.”

On Tuesday, RBA boss Philip Lowe announced the ninth rate rise, asking Aussies to fork out an extra $12,000 per year on their mortgage. Picture: Brendon Thorne/Bloomberg via Getty

Mr Phillips said he believed the extra-long loan terms meant that – alongside the added cost in interest – owning could become indistinguishable from renting.

“It should be reasonable in a wealthy country like Australia that you don’t have to spend 35 years paying off a house,” he told news.com.au.

“The idea of owning a home is that, eventually, you don’t have to keep paying to live in it. Once home loan lengths become so long, that’s no longer the case. If a 35-year-old takes out this 35-year mortgage, even if they never move or refinance, they will retire with mortgage debt. If a 40-year-old takes out a 40-year mortgage, they could die with mortgage debt.”

Australian Mutual and RACQ Bank also rolled out similar options as rates began to climb.

Truly dystopian.

A 35 year mortgage.

Let that sink in.

When I bought my first unit, the max length was 25 years.

A 40% increase in duration in a couple of decades.

And a huge additional interest burden.

Exhibit #3522 in 'Housing policy in Australia is broken'#ausbizhttps://t.co/I9pBK8423Y

— Scott Phillips (@TMFScottP) February 6, 2023

The two banks now offer highly unusual 40-year mortgages, which have the potential to slash the average borrower’s repayments by $550 and $714 respectively, according to Canstar’s research.

The hidden cost, though, is an extra $94,736 and $15,997 in interest.

A 40-year offering from Pepper Money – which Canstar financial services executive Steve Mickenbecker said had a reputation for taking on riskier loans – was even more drastic.

By taking on their “near prime” loan, designed for customers with less than ideal credit ratings, the average borrower could cut their repayments by $116 per month – but would rack up a whopping $278,936 extra in interest.

Canstar financial services executive Steve Mickenbecker said the new offerings should only be a ‘last resort’. Picture: Canstar.

Mr Mickenbecker said he was concerned many customers wouldn’t understand exactly how much extra money they would be fronting up.

“With plenty of people in such stress, this might look desirable. What this does is, in the short term, reduce the burden of the repayment,” he told news.com.au.

“But because you’ve reduced your repayments and you’ve extended the loan, there is a very substantial increase to the interest. Nothing comes without a cost, and I suspect that they (borrowers) don’t necessarily understand the magnitude of it.

“The magnitude is quite staggering.”

“If you buy a house with this loan when you’re 35, you’re accepting that you won’t own it outright until you’re in your mid-70s,” Mr Mickenbecker added.

“The concept of repaying the mortgage is still something to be celebrated. If we lose that, people are forced to reconcile that a part of their superannuation will go to finishing off the mortgage, which means their retirement savings could take a serious hit.”

RACQ Bank head of lending products and operations Medina Cicak said RACQ ensured borrowers understood the added costs before they took on a 40-year loan.

The loans target people in their mid-30s, who will be in their 70s by the time it’s paid off. Picture: Richard Walker

“We rolled out a couple of new options across the last 12 months … to provide our customers with the best loans and achieve their property goals, in response to the current market,” Ms Cicak told news.com.au.

“The 40-year loan is aimed at first entrants into the market, and the terms are based on the age you’ll be at the end of the loan. It’s targeting customers at around the 35-year-old mark.

“We’re focused on ensuring that, throughout the process, we undergo comparisons calculations to assist in choosing the best loan for every customer.”

The 35- and 40-year mortgages come after separate Canstar research showed the latest interest rate hike would add an extra $12,000 a year to the average Aussie’s mortgage repayments.

The RBA’s latest 0.25 per cent cash rate increase, announced on Tuesday, will increase mortgage repayments since April 2022 on a $500,000 loan over 30 years by a total of $11,628 per year – more than the combined cost of all other household bills — Canstar found.

Mr Mickenbecker recommended the new mortgages only be used as an “extreme last resort” – and even then, only for the short-term.

“Ask yourself, is this really a measure you want to take, or is there something else you can do that may mean more discomfort in the short-term, but leaves you in a better position long-term,” he said.

“I don’t want to knock this concept. It might help you get through a very tough time; it might mean you don’t lose your house. But it is exceptionally risky.”

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