50-year home loans - not the solution to housing affordability
Faced with a lack of affordable housing, the UK government is reported to be considering 50-year mortgages to help more Brits buy a home. Here in Australia, we face similar affordability challenges, and the traditional 25-year home loan term is increasingly stretching to 30 years. A number of lenders including Australian Mutual Bank, BCU and G&C Mutual Bank even offer 40-year home loans.
An extended term will lower monthly loan repayments. But it’s not a ‘cheap’ solution. The longer the term, the higher the interest bill.
As a guide, on a $600,000 loan with a rate of 5%, you could pay $3,508 in monthly repayments over a 25-year term. Pushing the term out to 30 years can lower the monthly payment to $3,221 – a reduction of $287 per month. The catch, as the table below shows, is that the overall interest charge can blow out from $452,262 to $559,535. That’s an additional $107,273 in interest for an extra five years on the term.
Dragging out the term to 40 years can have a dramatic impact on the loan cost. The long-term interest bill can end up at $788,726 – almost $230,000 more than a 30-year term.
|
Repayments on $600,000 home loan |
||
|
Loan term |
Monthly repayment |
Interest charge |
|
25 years |
$3,508 |
$452 262 |
|
30 years |
$3,221 |
$559,535 |
|
40 years |
$2,893 |
$788,726 |
|
Assumes 5.0% interest rate |
||
The downside of a longer term goes beyond an inflated interest bill. Already we are seeing more Australians enter retirement with home loan debt. The suggestion in the UK is that 50-year home loans could be an ‘intergenerational’ debt that parents pass on to their adult children. Maybe this will work for some families, but it’s hard to see many people celebrating the prospect of inheriting a home loan. And frankly, the real winner in this scenario is the bank, which stands to make a small fortune on a basic mortgage.
For homebuyers taking out a 30-year home loan, there is a way to slash the interest cost – and that’s by making repayments as if it was a 25-year loan. Your lender or mortgage broker can explain what this figure is for your mortgage, or jump onto the mortgage repayments calculator on the MoneySmart site. If your budget doesn’t stretch this far, making any additional payments will help you save on long-term loan interest.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.
Frequently Asked Questions about this Article…
A 50-year home loan can lower monthly repayments, making it easier for some people to afford a home. However, it's important to consider the long-term costs, as the interest paid over such an extended period can be significantly higher.
While 40-year home loans offer lower monthly repayments compared to 25-year loans, they result in much higher total interest costs. For example, on a $600,000 loan at 5% interest, a 40-year term could lead to paying almost $230,000 more in interest than a 30-year term.
Longer home loan terms reduce monthly payments but significantly increase the total interest paid over the life of the loan. This can lead to financial strain, especially as more people enter retirement with outstanding home loan debt.
An 'intergenerational' home loan is a concept where a long-term mortgage, such as a 50-year loan, is passed from parents to their adult children. While it might work for some families, it often results in a substantial financial burden.
You can reduce the interest cost on a 30-year home loan by making repayments as if it were a 25-year loan. This approach helps pay off the principal faster, reducing the total interest paid over the loan's life.
Entering retirement with home loan debt can strain your finances, as you may have a reduced income. It's crucial to plan for retirement by aiming to pay off your mortgage before retiring or by making additional payments to reduce the debt.
Making additional payments on your home loan reduces the principal balance faster, which in turn decreases the total interest paid over the life of the loan. Even small extra payments can lead to significant savings.
You can use the mortgage repayments calculator on the MoneySmart website to estimate your repayments and explore how different loan terms and additional payments can affect your mortgage.
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