Banks Plan 40 And 50-year Loans The Mortgage Of A Lifetime

The Sunday Age

Sunday July 30, 2006

CARMEL EGAN

YOUNG home buyers struggling to break into the property market are for the first time being offered mortgages that could last a lifetime.

GE Money has become the first Australian lender to offer 40-year mortgages, while at least two banks have started testing consumer reaction to 50-year loans.

With property prices again on the rise in Melbourne and the Reserve Bank of Australia expected this week to announce the second interest rate rise in three months, other lenders are expected to follow suit.

A spokeswoman for Westpac said the bank would consider introducing 40 and 50-year mortgages while the Commonwealth Bank said: "If our customers are interested in a term of that length, of course we would look at it."

Extended mortgages were first offered in the United States two years ago where they were aimed at average and low-income earners unable to enter hyper-inflated housing markets.

They are also available in Europe and Britain, where borrowers can take out 35, 40 and 45-year loans.

Long-term mortgages reduce monthly repayments by hundreds of dollars but lengthen the standard loan by 10 to 20 years, adding hundreds of thousands of dollars in interest payments if the loan runs its course.

With the average first home buyer now in their late 20s or early 30s, this could see people still paying off the family home in their 70s and even 80s.

Critics say similar schemes have "attracted flak" in the US, where they are known as "trailer trash loans", and in Britain there is concern they are debt traps for the working poor. But supporters, including the Australian Consumers' Association, have welcomed the new product as an opportunity for low-income earners to enter the increasingly expensive property market.

GE Money originally offered its 40-year loan only to business clients and investors, but it is now open to all home buyers.

"There is no restriction," said Evan Dwyer, GE managing director of small-to-medium enterprises.

"We will allow a regulated loan to go to 40 years if it is full-income verified.

"But it is not something we are deliberately marketing as an affordability issue.

"In Australia, we have found this product is more popular with investors."

Australian Consumers' Association spokeswoman Indira Naidoo said the new loans were a welcome alternative, provided borrowers were fully informed and aware that hefty exit fees might apply if they wanted to end the contract early.

"We have had a few organisations approaching us to find out what our reaction would be to 50-year loans," Ms Naidoo said.

"It is the way some institutions are going to go because of the situation overseas, high property prices, and the difficulty home buyers face trying to get into the market.

"There is room for these sorts of things, but people who want to get out of a 40-year loan should be aware of the exit terms and if there are disputes about not reading the fine print there should be adequate resolution terms."

According to mortgage broker Acceptance Finance, which has sold the GE loan, most people who are attracted to longer loans pay them out or refinance long before the expiry date.

"The average loan is paid out in seven years," said Acceptance Finance director Daniel di Conza.

"And with increased competition and as mortgage brokers have become 45 per cent of the home loan market, it would be rare for someone to allow their loan to run the full term, particularly in a 40-year loan.

"The main benefit of a 40-year term is that the applicant can minimise their repayment during the initial years, when in most cases cash flow is tightest.

"The GE loan allows applicants to make additional repayments once their cash flow is sufficient to do so, therefore they are reducing the loan term and the interest charged."

But shadow federal finance minister Lindsay Tanner sounded a note of caution in a climate in which increasing interest rates would "put enormous pressure on finances and a lot of hard-working families". "Before celebrating the arrival of the latest loans people should look very carefully at the fine print," he said.

GE's competitors remain cautious and none of the major banks offer the product. Bendigo Bank manager of retail said the bank was not looking at 40-year mortgages yet but would not rule them out in the future.

A spokesman for Virgin Money said it had looked at the option for first home buyers wanting to get a foot on the property ladder but had decided not to go ahead.

Australia's largest non-bank mortgage provider, Wizard Home Loans, which is owned by GE, said it would not be offering 40-year loans.

© 2006 The Sunday Age

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