The 40-year home loan

When you’re looking at your dream home, it’s hard to stop and think about the long-term costs of borrowing. But with home loan terms ranging up to 40 years, it’s always worth calculating these costs.

Cash-strapped home buyers are being lured by “for life” home loans that can end up costing them almost $200,000 in extra interest but only cut their repayments by $50 a week.

Only a few lenders offer products with a maximum term of 40 years – there are around 37 products in the RateCity database – among these are IMB and Police & Nurses Mutual Banking.

“A $400,000 home loan repaid over 30 years at an interest rate of 6 percent would cost the borrower $461,667 and require payments of $552 a week,” said Michelle Hutchison, spokeswoman for RateCity.

“The same loan repaid over 40 years would require repayments of $506 and cost $654,372.”

Life-long loans can help borrowers get into the property market and make life easier during the costly set-up stage of home ownership.

But borrowers should try to lift their repayments to cut the term as their circumstances improve, she said.

“While these products can be appealing to first-time buyers, given their reduced repayments, we urge borrowers to think about the long-term costs and consider whether it is worth it,” she said.

“A borrower with one of these products should try to accelerate repayments as soon as possible or see if they can switch to a home loan with a shorter term.”

Adding an extra $50 a week to a $400,000 loan repaid at 6 percent could save a borrower more than $205,000 long term and reduce a 40-year term by almost 11 years, according to RateCity calculations.

“Make sure you do your research and shop around using sites like RateCity because the difference in price between home loans is significant,” she said.

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