As property prices continue to rise and lenders fight for market share, borrowers are increasingly opting for loans with terms of up to 40 years – and brokers are being warned to be cautious.
Peter Wood, Australian general manager of Bluestone Mortgages, says that while Bluestone does not offer a 40-year term, many other lenders are now doing so, and longer-term mortgages have become increasingly popular of late.
“It’s probably a function of the market from an affordability point of view, obviously with the longer term mortgage it does make it easier for example for first home buyers to enter the market,” says Wood.
“There’s always competitive pressure too, which again is a healthy prospect in any market, so probably the lenders that are providing 40-year terms sit on the fringes and are looking at ways to capture borrowers outside the major lenders.”
CEO Phil Naylor, however, warns brokers to ensure they are undertaking due diligence before offering long-term loans as an option.
“The overriding concern is to ensure, in the first place, whether such a loan is appropriate to the circumstances of the borrower at all,” says Naylor. “In most cases it probably will not be.”
“There may be other strategies a borrower might want to consider as alternatives to a longer loan term (ie will it be less expensive in the longer term to save for a greater deposit).”
Wood stresses that, while longer-term loans can lead to higher interest payments, brokers will always put the buyers best interests first when looking at loan length-options.
“I think each buyer’s circumstances are different and we’re all governed in Australia by NCCP and making a loan not unsuitable. As long as we and the broker distribution market are adhering to that legislation and we asses 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.
“Where we sit I guess is that some of the people we deal with that have credit impairment or are self-employed, based on the information and broker analysis we would sometimes provide the borrower with an extended term.”
If a 40-year term were determined to be the best option for a borrower, the emphasis should be on refinancing to a shorter-term loan as soon as the borrower can afford to, says Naylor.
With the average lifespan of a loan sitting somewhere between three and five years, Wood expects most borrowers will choose this path anyway.
“If a borrower is taking out a 40-year term and the borrowers are 30-years old then 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,” says Wood.
“The brokers are very much up to speed in terms of the legislation and how they need to portray themselves in the market, the needs analysis and fact find missions and the need to discuss with borrowers – I think as long as they maintain the level of education required by the legislation we’ll be well covered in this area.”