People of Australia: there’s another option to get your foot on the property ladder

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We all know Scott Morrison has shaken up the election with a new policy aimed at first home buyers.

But you may not realise that some lenders already offer special mortgage products designed to make it easier for first home buyers to access the property market.

They’re called 40-year home loans.

That makes them different from regular mortgages, which usually have loan terms of up to 30 years.

The benefit of a 40-year home loan is that you lower your monthly repayments, because they’re spread out over 40 years rather than 30.

The negative, though, is that you end up paying more in interest, because now you have to make 480 monthly interest payments instead of 360.

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Who offers 40-year home loans?

Not many lenders offer 40-year home loans. Here are some of the few who do:

Lender Product Advertised rate Comparison rate
SCU First Home Buyer Loan 3.77% 3.82%
Teachers Mutual Bank My First Home Loan 5.11% 5.11%
UniBank My First Home Loan 5.11% 5.11%
Resimac Accelerate 5.96% 5.99%

The reason that not many lenders have 40-year mortgage products is because they’re seen as being riskier than regular mortgages.

Why? Because some lenders feel that if someone doesn’t have the income and/or savings habits to pay off a home loan over 30 years, they might not be able to pay off a 40-year mortgage either.

How much does a 40-year home loan cost?

Cost is the main reason you might be tempted to choose a 40-year mortgage over a 30-year mortgage – and also why you might ultimately apply for the 30-year home loan.

Imagine, for example, you wanted to borrow $400,000, pay principal and interest, and make monthly repayments. If you had a 4 per cent interest rate, your monthly repayments would be $238 lower on a 40-year home loan, but your total repayments would be $114,962 higher.

Interest rate 4% Interest rate 5% Interest rate 6%
Monthly repayments – 30 years $1,910 $2,147 $2,398
Monthly repayments – 40 years $1,672 $1,929 $2,201
Difference $238 $218 $197
Total repayments – 30 years $687,478 $773,021 $863,352
Total repayments – 40 years $802,440 $925,814 $1,056,408
Difference $114,962 $152,793 $193,056

How to turn a 40-year home loan into a 30-year loan

By stretching out your debt over an extra decade, and by taking on higher repayments over the life of your loan, you’re potentially taking on more risk.

One possible way around that is to use a 40-year loan term as a starting point rather than an end point.

For example, if you’re young and have a low income, a 40-year home loan might make it easier for you to qualify for a mortgage and get your foot on the property ladder.

Then, in, say, five years, when your income was higher, you could refinance to a mortgage with a much shorter loan term. If your new loan had a 25-year term, you would end up paying off your property within 30 years.

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