US President Donald Trump has floated the idea of introducing 50-year mortgages in America where, like in Australia, most home loans are taken out over 30 years.
The main pro for Trump’s plan is that monthly repayments would be lower, helping homeowners manage their everyday expenses more easily.
Despite this, early reactions to the scheme have mostly been negative, pointing out a few major flaws in the idea.
Massive repayment totals
When you take out a home loan, a large amount of your repayments are made purely to pay off the interest. Extending the term of your loan by 20 years will make the interest explode, especially as you’re paying off less each week.
For example, if you bought an $800,000 property with a 10% deposit, you’d need a home loan of $720,000. With a 6.25% interest rate over 30 years, you’d pay around $876,000 in interest – taking your total payments up to almost $1.6m.
Now our home loan repayment calculator isn’t set up for 50-year mortgages, but if you were to borrow the same amount with the same rate, you’d end up paying more than $1.6m in interest, taking your total up to around $2.3m over the 50 years.
Building equity slowly
Not only are you paying way more in interest over the term of your loan, you’re also building equity more slowly.
In the first few years of your mortgage, the majority of your payments go to paying off interest. Over time, as the balance drops, it gets easier to pay off the meat of your loan.
As you do this, you build up equity in your property. This is important if you ever want to buy an investment property. The way most people do this is to use existing equity as the deposit for their second home. Lenders take the difference between the amount owing on your loan and 80% of your property’s current value, which you can use in place of a standard deposit.
While paying less off your mortgage each month sounds enticing in the short-term, it might actually be doing you long-term harm.
Life expectancy
While some might argue that a 50-year mortgage might help people get onto the market sooner, it’s good to look at the base stats.
Currently in Australia, the average age of first-home buyers is 34 (and rising), with one in five waiting until they’re 40 or over to get their first property.
Add to that the current life expectancy in Australia is 81 for men and 85 for women, and you’ll see a quick problem. As things stand, the average man would be dead before they could pay off their mortgage while the average woman would enjoy one year of debt-free living.
Even without the looming threat of death hanging over your repayments, these mortgages will extend well into your retirement years. You might have the chance to sell your home and downsize to get rid of the remaining balance, but that would likely eat up your profits and leave you little to pass on to your children or pay for health care issues late in life.
Getting a home loan in today’s market
Thankfully, no one has suggested a 50-year mortgage in Australia yet. While some schemes like this are clearly set up to benefit someone else (in this case, the banks), mortgage brokers are here to help you get the best deal for you. Want some guidance as you buy your home? Answer a few quick questions here and one of our brokers will be in touch to help.
