Chasing customers means the forever home may now require a forever mortgage as well

With lenders offering a 40-year terms, five years of mortgage repayments could most likely be during retirement. Picture: iStock

Everyone has heard of the ‘forever home’. Welcome to the ‘forever mortgage’.

Imagine signing up for your home loan at, say, 30 years of age. The lender offers a 40-year term and you get to pay it back over four decades. Indeed, five years of that payment term will most likely be during your retirement.

Welcome to the new reality of the home loan market. The 40-year mortgage pitched out to the mortgage brokers this week from the Pepper Money group is aimed at “clients struggling with serviceability”.

In other words, those who can’t make their monthly mortgage repayments.

This is the tip of the iceberg. The major banks will join the party in the coming months once the notion of a mass-market, 40-year mortgage is up and running. Until now the majority of new mortgages were for 30 years.

As adviser, Stuart Wemyss of Prosolution Private Clients says: “This offers more flexibility and many people can afford to pay more — but, it’s also beyond doubt good business for lenders.”

On a $650,000 loan at 6.5 per cent if the customer moves from a 30-year term to a 40-year term, they will pay about $300 less per month. But, should they leave the terms unchanged, they will be up for around $346,000 of additional interest over the life of the loan.

Customers will, hopefully, understand by paying for longer you pay less in the short-term and a lot more in the long run.

To be fair, customers have been pushing for longer terms throughout the last year when it became increasingly clear much-anticipated interest rate relief was not going to arrive anytime soon.

An estimated 430,000 mortgage holders opted to extend the life of their mortgages in order to cut upfront costs in recent months.

Several big banks pushed hard to get the bank regulator to soften existing rules so they could lend more money to home hunters.

Specifically, the banks requested to cut the so-called ‘buffer rates’ applied by the Australian Prudential Regulation Authority.

Under APRA rules banks must add 3 per cent to your loan rate in order to test your ability to service the mortgage. If you apply for a 6 per cent home loan, the bank assesses you on the basis of a 9 per cent loan.

APRA has refused to budge on the buffer rules, but the banks have found ways around the barrier without breaking the rules.

CBA, the biggest bank in the market, has extended how long it will run an interest-only investment home loan out to 15 years. Until now, the total interest-only period allowed during the life of the loan has been 10 years for investors.

It’s a different twist on the same theme, allowing customers to push out obligations with the ultimate price of the reset coming further down the line.

Of course, the willingness to borrow big is underpinned by an assumption of property prices moving ever higher.

For now at least, property prices are actually falling, with Sydney and Melbourne dropping by nearly one per cent on a monthly basis.

Meanwhile, bank economists have pushed out their latest forecasts for rate cuts from around February to May 2025.