Across 30 years, assuming interest rates stayed steady at 5.8 per cent, you would be paying roughly $4100 a month. By the end of those three decades, you would have been charged $779,000 in interest.
If you chose a 50-year loan with the same interest rate (although banks often charge a higher rate on longer loans because they’re seen as more risky), you would be paying roughly $3600 a month. By the end of the loan term, you would have paid more than $1.4 million in interest.
Clearly, the 50-year loan costs more – almost double – in interest payments. For some, the possibility of buying a bigger or nicer place will be worth the higher overall price tag. For most, the financial cost (and mental burden of carrying debt into retirement) won’t stack up to the benefits.
But there is also some difference in how much earlier you could access a loan.
If we assume the bank will only sign off on a loan if your monthly repayments chew up no more than one-third of your income, you would have to be earning nearly $150,000 (or $75,000 each in a couple) to be approved for a 30-year loan. For a 50-year loan, you could be earning $130,000 (or $65,000 each).
It’s not a huge difference, but for some people, especially those for whom there is little room for career progression or pay rises, it could be the difference between home ownership and renting for life.
Why is that so important? Because as house prices have continued to climb and rents have taken up larger chunks of household income, many are getting stuck in the rental market, living paycheck to paycheck or ending up homeless.
We know in Australia, for example, that one in five private renters in 2019-20 were living in poverty, compared to one in 10 Australians with a mortgage, and an even smaller share of those who own their home outright. For private renters aged over 65, the chance they are living in poverty is 50 per cent.
We also know that women are more likely to be renters because they have lower average incomes and their lifetime earnings are often disproportionately affected if they choose to have children. Single, older women, especially those who rent, face the highest risk of poverty in Australia.
There’s a reasonable case for offering 50-year loans to those on low incomes or those who are especially vulnerable, or for those who are building homes.
Except for the few who rent purely out of preference, many rent because they never earn enough to save up for a deposit or make the repayments on a home loan. And because large amounts of their income go towards paying rent, they’re often unable to invest or save enough to build up their wealth (unlike the majority of those who have managed to get into the Australian property market who simply watch the value of their property grow).
Owning a home also gives people more stability knowing they will not be kicked out on the whim of a landlord, allowing them to build up a community and routine. For many, that stability is priceless.
In Australia, people could draw down on their super (or use their pension) to repay any remaining amount of their home loan after retiring. At the very worst, they could sell the property and have access to a substantial amount of wealth that they have built up.
But it’s also important to remember that any policy that increases demand – or brings it forward – unless matched by a growth in supply, will push up property prices across the board.
There’s a reasonable case for offering 50-year loans to those on low incomes or those who are especially vulnerable, or for those who are building homes (and therefore adding to the country’s housing supply).
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But it is no Band-Aid fix for our housing affordability problem. And it shouldn’t come at the expense of focusing on tax reform (reducing concessions such as the capital gains tax discount for existing properties) and most importantly, boosting supply.
Offering 50-year loans at a fixed rate, as it is being proposed in the US (where an overwhelming number of loans are 30-year ones with interest rates which are locked in) is a separate discussion. And it is an approach with both benefits (certainty and stability) and costs (the risk of getting stuck with an interest rate much higher than you would otherwise have paid under a variable interest-rate loan).
The bottom line, though, is that 50-year loans do not, on their own, improve housing affordability for most people. In fact, they could drive up property prices across the board. These half-century loans should be offered sparingly to those who need it to escape lifelong (or very long-term) renting.
The cost? More pressure on housing demand that must be matched by growth in housing supply. And accepting the idea of a loan that may very well outlive you.
But if house price growth continues to outpace growth in incomes, as it has for several decades, 50-year loans may become a necessity – not a choice – for those wanting to own their own home.
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