40-year trap: risky home act getting popular
More Aussie households are turning to a form of short-term financial relief that could lock them into pricey obligations for four decades.
Soaring living costs have pressured a growing number of Aussies into risky 40-year mortgages that could trap them into expensive debt obligations extending into retirement.
Alarming data from Finder.com.au revealed home seekers have been taking extreme steps to lower their monthly repayments, forgoing long-term financial stability for short-term relief.
The research showed nearly a third of Aussie adults polled would take out a 40-year home loan if it reduced their monthly repayments to a more affordable level.
It comes as housing affordability deteriorated to a three-decade low following the Reserve Bank’s barrage of interest rate hikes over 2022 and 2023, with this week’s cut offering minimal repayment relief.
And with the latest interest cut expected to boost demand in the housing market and eventually drive up home prices, experts said some home seekers were feeling pressure to get into the market sooner – through whatever means were available to them.
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Three lenders currently offer 40-year mortgages in Australia – two of those exclusively to first home buyers, Finder analysis showed.
Finder.com.au head of consumer research Graham Cooke said anyone taking up one of these loans today would be locked into debt until 2065.
“Owning a home has become an elusive goal for an increasing number of Aussies,” he said.
“For many, a 40-year loan makes home ownership more accessible sooner. However, in my experience, while these loans may have lower monthly repayments, they often end up costing significantly more over time.”
Finder analysis showed the monthly repayment for the average Australian loan of $641,416 would drop by over $300 on a 40-year loan compared to an identical 30-year loan, but the full repayment would cost the borrower $316,000 more.
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“Essentially, these loans offer a small reduction in your monthly cost in exchange for a huge increase in the cost of your mortgage overall,” Mr Cooke said.
He added that 40-year mortgages were risky for those who were also using small deposits such as the 5 per cent permitted under certain government schemes or with parental guarantees.
“If you only lay down a 5 per cent deposit, a 5 per cent drop in house values will lock you into negative equity and a loan you can’t get out. If you are looking at this end of the market, tread carefully.”
Mr Cooke said even homeowners on more widely used 30-year loans were effectively extending the life of their debt through refinancing deals that “re-topped” their loans.
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Finder search published last year showed 13 per cent of homeowners had extended the length of their loan in the year prior to lower their repayments. Nearly half extended their loans by more than five years.
Aussie Home Loans broker Rod Pierce said lenders were often willing to extend 40-year terms to those in their 40s and 50s under certain conditions.
“It may continue to grow in popularity with a certain demographic but if it’s abused people will run into problems,” Mr Pierce said.
He explained that the arrangements could work for those likely to get a boost in income or cash at some point in the future, such as an inheritance, which would allow them to refinance to a shorter term.
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“It’s obviously not a good option for the long-term, but if the rate properties are appreciating is faster than your ability to save, it’s a tool to at least get into the market.
“It can work if you are strategic. If you don’t come in with a plan of how to get out of the longer term you can get locked into a 40-year loan that will be substantially more expensive.”
Originally published as 40-year trap: risky home act getting popular