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There are currently several lenders who offer home loan periods of up to 40 years, instead of the usual 20 to 30 year term. However, many experts are warning borrowers to think seriously before opting for this four decade commitment.

More people are stretching their mortgages out even longer, resulting in hundreds of thousands of extra dollars being spent on interest.

There are currently several lenders who offer home loan periods of up to 40 years, instead of the usual 20 to 30 year term. However, many experts are warning borrowers to think seriously before opting for this four decade commitment. 

Many lenders have introduced these loans to help first home buyers get into the property market sooner. Although this option may initially reduce the financial burden for borrowers through smaller repayment amounts, the long term costs will most likely outweigh the benefits. 

For example, according to Finder.com.au, a $400,000 loan with an average interest rate of 7 per cent would end up costing the borrower an additional $235,000 in interest costs than they would if they chose a 30-year-old loan period. Equity is another issue you need to consider. The equity in the property will build at a slower rate, which may have an impact if you are planning to use it to help purchase another property.

There is also the issue of interest rate rises. Although the RBA cash rate has remained the same for the past six months, there is a good chance it will increase (as well as decrease) during the next 40 years.

According to the Mortgage and Finance Association of Australia’s chief executive officer, Phil Naylor, most people who take out a 40 year mortgage have the intention of refinancing into a shorter mortgage when they are in a better position to pay off their loan quicker. However, this strategy could possibly backfire if the borrower does not manage their finances properly. For example, if, after being approved for a 40-year loan, you let your finances slide by incurring more debt and not meeting repayments, you may struggle to be approved for a refinance loan and are then stuck with the loan for the 40 year period. So, if you do plan to refinance your 40 year loan to a shorter term, make sure you take the time now to maintain a flawless repayment history and reduce as much debt as possible.

Although there are several risks involved with this type of loan, it may be a viable option for investors. By having lower repayments, it could create a higher rental yield as well as a larger buffer between rental repayments. However, if your income strategy is capital gain, a longer loan term may not be ideal.

Overall, a 40 year loan mostly benefits the lender, not the borrower. This loan may help first home buyers purchase a property sooner and also improve the rental yield for investors, but in the end, you will potentially be spending hundreds of thousands of extra dollars just on interest.