‘That’s pretty serious’: The $350,000 problem with 40-year mortgages

Exclusive: A growing trend of 40-year mortgages could see homebuyers saddled with up to $350,000 in extra interest over the lifetime of a loan, an expert has warned.

Australian bank AMP announced a new four-decade investor loan nicknamed “equity flex” on July 30, which offers up to 10 years of interest-only repayments as a response to the federal government’s sweeping tax changes.

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OpenCorp chief executive Cam McLellan said that, while a longer term may be an entry point for buyers struggling against property prices and interest rates, it will hurt owners in the long term.

“It’s a much higher lifetime interest cost for a person,” McLellan told nine.com.au.

“For example, if you have a $600,000 loan, we estimate about another $200,000 in interest you’re going to pay over the lifetime of the loan.

“For a million dollar loan, that’s pretty serious. You’re looking at probably $300,000 to $350,000 in extra interest over the lifetime.”

An extra ten years tacked on to the average mortgage will leave buyers more exposed to more interest rate fluctuations – of which there could be plenty by 2066, McLellan added.

Several lenders in Australia already offer 40-year loans, including Unity Bank, Pepper Money, Liberty and Bluestone.

Currently, none of the country’s big four banks support this type of product.

Some European and UK lenders also offer 40-year mortgages.

And in Japan, some owners sign onto ultra-long, 100-year mortgages to keep homes across multiple generations of families.

McLellan said he wouldn’t be surprised if big Australian banks see where the market is headed and advertise this as an option to first homebuyers.

“There’s no doubt that they’ll be doing it,” he explained.

“It means the banks are getting more bang for their buck over a long period.

“And people are living longer, people are working longer... it makes sense.”

AMP is among the biggest lenders to break new ground on longer mortgages.

AMP’s director of lending and everyday banking Michael Christofides said the bank introduced the 40-year loan after brokers claimed investors wanted ways to improve their cashflow.

“Equity Flex was developed with those conversations in mind,” he said.

“Brokers wanted greater flexibility for eligible investors with strong equity positions who may be asset rich but increasingly conscious of cashflow.

“This product gives brokers another option to help clients navigate changing circumstances while maintaining a long-term investment strategy.

“It’s about providing flexibility and choice, backed by responsible lending standards.” 

Will it help young buyers enter the market?

Unserviceable monthly repayments can be the biggest barrier for first homebuyers.

Although the accrued interest will be sky-high, 40-year loans may shrink the monthly repayments by hundreds of dollars.

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The average Australian mortgage is $735,000 with an interest rate of 6.15 per cent.

The monthly repayments over a 30-year mortgage are around $4479

Under a 40-year loan, the monthly repayment decreases to $4121.

McLellan described this as the biggest benefit of locking yourself into an extra decade of repayments.

“It’s going to help a lot of people get into the market who can’t afford to jam all the repayments over 30 years,” he said.

“The extra 10 years actually will allow people to get into the market a bit sooner, and I think it will become the norm.

“It probably makes it easier for property investors to manage multiple properties, and you because you can do that longer interest-only period of 10 years where it used to be five.”

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