40-year mortgages were unthinkable until very recently. The standard mortgage term throughout the twentieth and early twenty-first centuries was 25 to 30 years, with most people taking out a mortgage expecting their mortgage to be fully paid off by retirement.
Times have changed. Over the past few decades, skyrocketing home prices and stagnating wages have made housing unaffordable for many. Even with historically low mortgage rates, regular mortgage repayments spread over the standard 25-year period are unachievable for a large number of prospective homeowners. And this is where the 40-year mortgage option has come in. Mortgages with terms of over 30 years are now becoming more common. However, they still represent a small fraction of mortgage products.
Understandably, making mortgage repayments well into retirement is daunting for some people. On the other hand, if a 40-year mortgage makes the difference between someone owning their own home and renting for the rest of their life, it could be a viable option. Here are the main factors that need to be considered before committing to a 40-year mortgage.
There is a maximum age for a 40-year mortgage
Given that the 40-year mortgage term is much longer than the standard 25-30-year mortgage, most lenders will restrict 40-year products to people under a certain age. The exact age limit will vary from lender to lender. It will be affected by factors like the applicant’s job, pension contributions, and retirement plan. Many lenders will want the mortgage term to end by the time the borrower is 75, so that will have to be factored in before applying for one.
The monthly repayments will be smaller
This is an obvious point, but it can make a massive difference to a homeowner’s quality of life. Someone with a large family will have high child care expenses, and smaller mortgage repayments can make a real difference between a strained financial situation and a comfortable one. While it’s true that the repayments will have to be made over a much more extended period, the option may suit those who aren’t planning on retiring until well into their 70s.
For some people, getting a 40-year mortgage will be the only way to get on the property ladder. Hearing a mortgage broker or lender tell borrowers that they do not qualify for conventional mortgage products can be a huge shock and disappointment. However, being presented with the 40-year mortgage option can restore the possibility of homeownership which is very important to many people. If homeownership is meaningful to a potential borrower as a life goal, but their financial situation prevents them from taking out a conventional mortgage term, they should seriously consider the 40-year option.
The total amount of interest to be paid will be larger
This is the most significant trade-off with the 40-year mortgage; although the monthly repayments will be smaller, the mortgage will be more expensive overall because more interest will be due on the mortgage than on a mortgage of 25 or 30 years. So, if the mortgage’s overall cost matters to the applicant, then the 40-year mortgage puts them at a financial disadvantage.
The main thing to understand with mortgage interest is that it’s calculated on the amount of the loan left to repay, not on monthly repayments. So, the more that remains on an outstanding mortgage balance, the longer interest will need to be paid.
The interest rates on 40-year mortgages are also slightly higher than on 30-year mortgages; on average, they pay 0.25 percent more on their repayments.
The difference in interest may not be enormous when put into the perspective of a lifetime. A $200,000 mortgage, for example, over 40 years will cost around $66,000 more than a 30-year mortgage. Only the mortgage applicant can decide whether they’re comfortable with the extra interest expense. While it may be worth putting it into perspective, some people will dislike paying more interest as a matter of principle.
40-year mortgages aren’t regulated in the same way as conventional mortgages
40-year mortgages were much more common pre-2008; we all know what happened then. Because of the financial crash and its close links to the mortgage market, 40-year mortgage products are now offered by far fewer lenders than they were previously. The reason is that 40-year mortgages do not qualify for The Consumer Financial Protection Bureau (CFPB). Unqualified mortgages are generally considered riskier, and some lenders don’t like dealing with them. This means that getting a 40-year mortgage is somewhat more difficult than a 30-year mortgage, though by no means impossible. It’s almost certainly possible to find one when buying a property in a housing hotspot with more expensive properties. (Think Miami, LA, NYC, and other in-demand metropolitan areas.)
There may be better alternatives
Those struggling to get a mortgage but thinking that a 40-year mortgage isn’t for them may not be all out of options. An interest-only loan may work better where only the interest on the mortgage is repaid for either part or all of the mortgage term. The rest of the loan is then repayable either in a lump sum upon the sale of the property or in monthly installments after a fixed period of interest-only repayments. There are stringent criteria to qualify for this type of loan, and applicants must check with their bank or lender that they could be offered this option. But it’s worth considering before committing to a 40-year mortgage.
Working with a mortgage broker may give you more options to consider – these professionals specialize in providing alternatives to the typical mortgage model. Access the broker directory and get in touch with a local mortgage expert today.