40 year home loans

[kph]

Just heard on the news that some lenders will be offering 40 year home loans in order to reduce the repayment rate to allow first home buyers to get into the market.
That same market they have currently been priced out if ...

What are the implications of this ?? ( apart from the extra $200,000 they will end up paying to pay off their house)

kp

 

[alexlee]

Theoretically it supports the first home buyers market, since FHBs now have more ability to buy. In reality, it might just prolong the flat market we have now in the East, instead of letting it bust and boom again.

I wonder whether we'll get something like Japan did after the bubble burst: interest rates went to zero, meaning theoretically it was extremely easy to borrow money. However, people had so little trust in assets that they STILL didn't borrow. Japan has generational loans where the current borrow never plans to pay the loan off in their lifetime. Property has been dead for over a decade.

I don't think it'll get that extreme, but if enough first home buyers just decide Sydney property, for example, is overpriced for the long term they'll just keep renting.
Alex

 

[Kristine..]

Hi kph

There is nothing new in this - the 'news' is old news.

40 year Principal & Interest loans have been around for a long time. There are no real implications involved with this as the average loan life is about 4.7 years.

If you are part of the extremely small segment of the market who buys one property, lives in it and pays it off with your original loan, then you have a 40 year window of opportunity to do that. Should you decide to take the full 40 years then obviously you will pay more interest than if you took 30 years or 20 years.

However, this - for the majority of applicants - means that you may qualify to borrow whereas the general serviceability model may mean that you would not be eligible to borrow for a 30 year loan.

Keep in mind that lenders may not factor in that your income will increase, but must factor in a 'sensitised' interest rate or 'sensitised' loan amount when considering whether a borrower can afford to service the loan over an extended period of time.

The Interest Only borrower must also meet this serviceability criteria.

The difference in monthly payments between Interest Only, Principal & Interest over 30 years and Principal & Interest over 40 years means that the 40 year loan is a close competitor to the Interest Only loan.

For the long term investor, this may be an attractive option rather than starting with Interest Only then switching to Principal & Interest repayments for the balance of the original term eg a 30 year loan, with five years IO, will require P&I repayments over 25 years. This would be a hefty increase in monthly payments, probably just when the borrower has increased their household expense / reduced their income (that's called having children!).

Many people like to think that they will stay in the same house and pay off the loan over time. Investors do think differently to home buyers. I have written a few 40 year loans but not many, as I deal mainly with investors who only co-incidentally buy homes as well. Investors tend to use the least amount of cash flow possible to service the deal, and Interest Only loans are to date more popular than 40 year Principle & Interest loans.

Cheers

Kristine

 

[alexlee]

I certainly can't see how 40 year loans would be better than IOs for investors (unless the interest rate for the 40 year loan is lower than the principal repayment making payments on the 40 year loan lower than the IO loan). Even if the principal repayment component is lower on the 40 year loan, there's still SOME repayment, and as investors we would want to minimise that.

Reading the US newspapers, they're saying how ARMs (adjustable rate mortgages, i.e. floating rate mortgages) and interest only mortgages means a lot of people are going to get hurt from the property downturn. Traditionally the US used 30 year FIXED RATE P&I loans!!! Here in Oz, we've been using floating rates and IOs for longer. On the other hand, PPOR interest is deductible in the US, which makes buying your PPOR much more compelling (and is part of the reason why yields in the US are so much higher than in Oz, because there are less 'investors' who buy for the 'tax breaks', since in the US your PPOR IS a tax break.)

Seems to be just the market developing new products as it goes along. I honestly don't think it'll change the general trend of booms and busts in the markets. Long term, it all evens out. As investors, we should still buy when we are able to, within our own safety criteria.
Alex

 

[nat r]

I was in the US last week meeting with various sub-prime mortgage lenders and a few of them are starting to roll out 50 year loans.

However, the real reason they offer 40 year loans is that the rating agencies (who give credit ratings to the lenders bonds) were penalising them for doing IO loans, where as the rules the agencies apply give credit for an amortising loan ...no matter how long the amortisation period may be.

 

[buzzlightyear]

Just did some quick calcs, assuming 7.32% for every $100k on attached spreadsheet

If my calculations are correct, based on the above assumptions, to equate the repayments between a 30P&I and a 40P&I loan, a 30P&I loan interest rate needs to be 6.69% versus a 7.32% (40P&I)

Do all banks offer 40P&I loans or is it only a few?

 

[stretchy]

If this loan was adopted, I can see a mild positive affect on the housing markets due to the extra money available. People tend to borrow the maximum they can afford without really thinking of the loan term (the difference between 30 and 40 years is irrelevant when you are 25) so a 40-year term would imply more cash to spend.

Even if the average loan age is 5 years it wont stop many from using 40-year loans simply as a tool to borrow more money then they previously could (and buy a bigger/better house).

 

[mja]

SMH covered this recently:

http://www.smh.com.au/news/national/the-mortgage-of-a-lifetime/2006/07/29/1153816422872.html

-- MJ.

 

[D.T.]

I'd see a mild negative affect if this was implemented. This is mainly because investors dont care about the term, only ppor purchasers do.

Most of the people that I know who rent do so "because I don't want to be tied down for 30 years". If the allocated sentence was longer, then fewer of the renters would face the jury.

Purely psychological.

 

[nat r]

I find it odd that people say "I would not want to be tied to a loan for 30 or 40 years" when they are by default saying "I would rather rent for the next 60 or 70 years"


I guess we should be happy ....as we all need more long term tenants !!

 

[D.T.]

Yeah but they'll win lotto soon, and buy a house then.