- 40-year mortgages are not a good deal
- Smaller repayments lead to higher interest
- READ MORE: Aussie couple turns $60,000 into $153 million real estate empire
A financial expert has revealed how the new 40-year mortgage will cost borrowers hundreds of thousands of pounds in interest payments compared to its 30-year predecessor.
Home lender Pepper Money has launched the new mortgage which expires in December 2065 for new borrowers.
Scott Phillips, Chief Investment Officer of investment service Motley Fool, called the long-term mortgage “the worst innovation of 2024” and one that made his “head explode.”
Mr Phillips made calculations based on the average Australian home loan of $625,000, although he admitted “many people are paying even more”.
He had to do them himself because he found that most loan calculators wouldn’t go beyond the 30-year term, which used to be the longest loan available.
According to his calculations, borrowing $625,000 at six percent for 30 years meant someone would pay $3,747 per month and $724,000 in interest, bringing the total repayment to $1.349 million at the end of the three-decade term.
Borrowing the same amount of money over forty years meant that the mortgage holder could get a lower monthly payment of $3,438, which was $300 less per month, but the interest expense that would accrue in 2065 would be $1.025 million.
This represented $302,000 more than the 30-year deal and meant that interest would add more than $1 million to the original principal amount of $625,000.
Motley Fool Chief Investment Officer Scott Phillips Says New 40-Year Mortgage Is a Bad Deal for Borrowers
“I don’t know about you, but I think that’s a lot to pay just to save $308 a month,” Mr. Phillips wrote.
The 40-year loan could have another negative impact that goes against the stated goal of making financing more affordable for those paying less, Mr Phillips argued.
He wrote that those who could afford to pay back $3,747 a month could now borrow $680,000, which would be tempting in a competitive real estate market.
“Once 40 years becomes the standard loan length, everyone will default to that,” Mr Phillips argued.
“And the person who asks the bank for a 30-year mortgage takes his $625,000 loan with him when he tries to buy a house, only to be outbid by people with longer mortgage terms and $680,000 in their back pocket.”
According to Mr Phillips, the 40-year loan would likely result in the same monthly repayments remaining the same, while interest rates and total repayments would be much higher and house prices would also rise.
Extended mortgage terms could further push up house prices, he warned
“Seriously, this is not an affordability measure,” he wrote.
‘At best it is a well-intentioned mistake and a sign of desperation from buyers who feel excluded from the housing market.
‘But, as I have hopefully shown, 40-year mortgage terms would be a disaster for everyone except banks and sellers – two groups who have a right to make money but who don’t need the generosity of first-home buyers to have.
“This is an ‘innovation’ that must be nipped in the bud… before it becomes the norm.”