On February 7, 2023, UBank announced that it is extending its loan term for refinances from 30 to 35 years. While this may seem like a good option for homeowners seeking relief from relentless rate rises, it could potentially cost them more in the long run.

Although 35-year terms have always been available for home purchases through UBank’s home loan products, they have now made them available to both refinance and purchase applications. This means that homeowners can now consider extending their loan term to 35 years when refinancing their mortgages.

Benefits and Drawbacks of a 35-Year Loan Term

The length of the loan term can significantly affect the amount of monthly home loan repayments, almost as much as the interest rate. A longer loan term means smaller monthly payments because the mortgage principal is divided into a larger number of repayments, and each repayment covers a smaller portion of the overall balance. However, the downside is that a longer loan term with a larger number of repayments means paying more interest in total than with a shorter loan term.

Comparison of Monthly Repayments 

For instance, let’s take a $400,000 mortgage with an interest rate of 4% or 5%, paid over a term of 30 or 40 years. The monthly principal and interest repayments for each scenario would look like this:

Monthly repayments — 30 years

4% interest rate: $1,910

5% interest rate: $2,147

Monthly repayments — 40 years

4% interest rate: $1,672

5% interest rate: $1,929

The difference between 30 and 40 year loan terms is $238 and $219, respectively. However, the total repayments for a 30 year loan term amount to $687,478 and $773,021 for a 4% and 5% interest rate, respectively. In contrast, the total repayments for a 40-year loan term are $802,440 and $925,814 for a 4% and 5% interest rate, respectively. This difference shows that borrowers could end up paying more in interest costs over the long term when opting for a longer loan term.

It’s worth noting that most home loans in Australia start on terms of between 20 and 30 years. Longer loan terms of 35 and 40 years are relatively rare. When refinancing a home loan, it’s essential to consider both the loan term and the interest rate. For instance, if you were ten years into repaying a 30 year mortgage and then refinanced to another 30 year loan, you would be in debt for 40 years in total, costing you much more in interest than sticking to the original term length, even if the new interest rate is lower.

With the Reserve Bank of Australia (RBA) making multiple back-to-back hikes to the national cash rate and mortgage lenders passing these hikes on to customers as higher interest rates, many Australian homeowners are under financial stress. These cost-of-living pressures could mean that more Australians may need to refinance onto home loans with longer terms of 35 years or more to help keep their repayments affordable.