- 40-year mortgages are not a good deal
- Smaller payments earn more interest
- READ MORE: Australian couple turns $60,000 into $153 million real estate empire
A finance expert has revealed how the new 40-year mortgage will cost borrowers hundreds of thousands in interest payments compared to its 30-year predecessor.
Home loan lender Pepper Money has launched the new mortgage which will run until December 2065 for new borrowers.
Scott Phillips, chief investment officer at the Motley Fool investment service, called the long-term mortgage “the worst innovation of 2024” and one that made his “head explode.”
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 discovered that most loan calculators didn’t work beyond the 30-year period, which was previously the longest loan available.
By their calculations, borrowing $625,000 at six percent for 30 years meant a person would pay $3,747 a month and $724,000 in interest, making the total repayment $1.349 million at the end of the three-decade period. .
Borrowing the same amount of money for 40 years meant the mortgage holder could have a lower monthly payment of $3,438, which was $300 less per month, but the accumulated interest bill by 2065 would be $1.025 million.
This was $302,000 more than the 30-year agreement 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 Argues 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,” Phillips wrote.
The 40-year loan could have another adverse effect that ran counter to its stated goal of making finance more affordable for those paying less, Phillips argued.
He wrote that those who could pay $3,747 a month could now borrow $680,000, which would be tempting in a competitive housing market.
“Once 40 years becomes the standard length of a loan, everyone will default to it,” Mr. Phillips said.
“And the person who asks the bank for a 30-year mortgage will take their $625,000 loan with them when they try to buy a home, only to be surpassed by those with longer mortgage terms and $680,000 in their back pocket.”
According to Phillips, the 40-year loan would likely result in monthly payments staying the same, while interest and total payments would be much higher and home prices would also increase.
Extended mortgage terms could further inflate home prices, warned
“Seriously, this is not a measure of affordability,” he wrote.
‘At best, it is a well-intentioned mistake and a sign of desperation on the part of buyers who feel left out of the property market.
‘But, as I hope I have 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 largesse of first-home buyers.
“This is an ‘innovation’ that should be nipped in the bud…before it becomes the norm.”