Lenders have been turning up the heat recently in their bid to gain their share of the home loan market.
But it’s not just interest rates that they are cutting to attract customers, we are also seeing borrowers being offered longer term loans, sometimes up to 40 years.
This is giving borrowers the opportunity to have smaller repayments, and it can help first-time buyers enter the market as a result.
MFAA CEO Phil Naylor spoke to Australian Broker Online and warned that offering longer-term loans can be dangerous.
“The overriding concern is to ensure, in the first place, whether such a loan is appropriate to the circumstances of the borrower at all,” he said.
Mr Naylor suggested it might be a better idea to take longer in saving for a deposit than taking out a longer-term loan.
“There may be strategies a borrower might want to consider as alternatives to a longer term loan (ie will it be less expensive in the longer term to save for a greater deposit).”
If a long-term 40 year loan is chosen as the best option for a borrower, it can be a good idea to refinance the loan to a shorter term as soon as the borrower can afford to, to save on interest payments.
Australian general manager of Bluestone Mortgages Peter Wood told Australian Broker Online that most borrowers will do this by default anyway with the average lifespan of loans being between three and five years anyway.
“If a borrower is taking out a 40-year term and the borrowers are 30-years old then the brokers need to, as part of the analysis, talk with the borrowers about how they exit those loans should the loan go for 40 years,” he said.
“I think each buyer’s circumstances are different and we’re all governed in Australia by NCCP and making a loan not suitable. As long as we and the broker distribution market are adhering to that legislation and we assess each individual loan as it comes in the door there is no reason to say that a 40-year term is not appropriate in some circumstances.”