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A 50 year home loan?

Caution is being urged on home loans as GE Money becomes the first Australian lender to offer home loans over 40 years instead of the traditional 25 or 30 years. Westpac and the Commonwealth Bank have also confirmed they are considering introducing mortgages over 40 or 50 years.

The new offers are aimed at those who may not meet current lending requirements and increase the amount of money they can borrow. Long-term mortgages would reduce monthly payments but add to interest repayments over the course of the loan.

However, highly respected financial advisor Noel Whittaker says “I am horrified at the suggestion that people with tight budgets look at 40 and 50 year loans. Remember the way compound interest works – as the term grows the interest that you pay or receive grows exponentially. If you had a loan of $300,000 and contracted to pay it back over 25 years at 7% you would pay $2,120 a month and incur interest of $336,000. The payments on a 40 year term would be $1,864 a month – that’s just $59 a week less, but the interest would jump to $595,000.

Let’s face it, ownership costs such as rates and insurance are at least $60 a week. If you can’t afford the payments on a 25 year loan, it’s questionable that you would be able to afford any mortgage, even if it was stretched over 40 years.”

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