Mortgage terms could be pushed out to 40 years
Rising house prices could push mortgage terms out to 40 years in New Zealand, but extra interest would be the side effect.
Several cities had double-digit growth in house prices over 2020, and by December the average house cost $788,967.
Higher prices have already pushed the loan terms up from the 20 years that used to be standard, Massey University banking expert Claire Matthews told Stuff.
‘‘It has extended a little bit, and it is associated with the higher house prices. As interest rates came down, making the same repayment meant [people] had a shorter term. But as they need to borrow more they’ve had to extend the term to keep the payments at that level that’s affordable.
‘‘So I think [the term] has got to 25. It may even have got closer to 30. But I think there’s probably still some room there for people to look at.’’
Forty-year loans are a possibility, but are more beneficial when bigger amounts are borrowed, the associate professor said. However, an economist warns longer terms won’t help firsttime buyers ‘‘pole vault’’ onto the housing ladder, and at least one bank says 30 years is its limit for loans.
Smaller repayments are the longer loan’s main advantage.
The tradeoff is hundreds of thousands more in interest as it’s repaid more slowly – for example, on a $600,000 loan with Westpac’s latest floating rates.
Fortnightly repayments would be $289 less on a 40-year term than a 25-year one, according to the mortgage repayment calculator. But there’s a difference of several hundred thousand in interest over the course of the loan: about $419,603 on the shorter term, or $729,768 on the longer.
Matthews said longer-term loans could also be a hard sell psychologically, as many people find 25 or 30 years daunting.
‘‘To look at being committed to making those loan payments for 40 years, I just think psychologically it would create some issues for people.’’
And the deposit required isn’t likely to change, Matthews said. In fact, banks may be stricter on the 20 per cent minimum because early repayments will be mostly interest.
‘‘You take longer to build up your equity. Therefore . . . there’s a slightly higher risk for the bank.’’
Terms of around 25 years go back as far as Matthews can remember, and she described them as being linked to the life cycle.
Someone who started work at 15 might be able to buy around 25, and be 45 at the end of their term.
That gave them time to prepare for retirement, or to move to a bigger home. House prices, income levels, and bank risk all fed into the model, she said.
ASB’s maximum loan term is 30 years, executive general manager of retail banking Craig Sims said in a statement.
‘‘We aren’t currently considering introducing longer terms.’’
While Infometrics senior economist Brad Olsen could see 40-year loans as a possibility, he said repayments aren’t the main hurdle.
‘‘It really is that pole-vaulting that you need to get onto the bottom of the housing ladder, that causes the main issue,’’ he said.
‘‘That’s why high house prices are an issue. For anyone who’s out there who’s trying to scrimp and save for a deposit, every month it seems like everything gets further and further out of reach.’’
Low interest rates mean households are spending a smaller share of their income on loan repayments, he said.
It was 32 per cent in the second quarter of 2020, according to CoreLogic figures.
That compares to 35 per cent a decade ago and 38 per cent 15 years ago.
‘‘At the moment, the share of income that is required for a mortgage repayment is actually below the almost two-decade average.
‘‘I feel like a lot of people do want to be able to move through their mortgage as quickly as possible.’’
‘‘For anyone who’s out there who’s trying to scrimp and save for a deposit, every month it seems like everything gets further and further out of reach.’’
Brad Olsen