Could 40-year mortgages come to NZ?

If you’re already anxious about paying off your mortgage for the rest of your life – and even into your retirement – spare a thought for borrowers in the UK.

New data released there show that mortgage terms of 40 years are becoming more common in Britain. Nearly six in ten (57 percent) of mortgage products have a standard maximum term of up to 40 years. That’s up from 36 percent five years ago, and means that UK borrowers in their thirties would still be paying off their house well into their 70s and into retirement.

But don’t expect that to happen any time soon in New Zealand, says John Bolton, head of Squirrel Mortgages. UK interest rates have been very low since the global financial crisis of 2008, hovering around 2 to 3 percent, and people have much lower debt to interest rates as in Australia or New Zealand.

In a low interest environment, a higher proportion of repayments go to paying down principal, not just interest, but even so, interest racks up quickly. Bolton says that younger borrowers should be aiming to pay off their mortgages faster, not pushing out repayment for 40 years.

“I wouldn’t be embracing that. If I had the realisation that I will be going into retirement with a mortgage, I’d have a strategy to downsize.”

Currently no New Zealand banks offer mortgage terms beyond 30 years.

“Of course I’d never say never,” says Bolton. “Maybe if we had really low interest rates for five years or so, it might. But interest rates are really volatile here, banks are reluctant to have those sorts of loans on their books.”

The Commission for Financial Capability’s research shows that already some 12 percent of New Zealand people in their 70s are still paying off their mortgage. Managing editor Thom Hartmann says that is the thrust of the Commission’s current consultation with New Zealanders for this year’s Review of Retirement Income Policies.

“The framework in New Zealand is that superannuation is not made for people to still be paying down their mortgage,” he says. “So the longer you go out with payments, the more chance that retirees are still paying.”

But he points out that borrowers may have a strategy, and that may not include holding a long loan through to maturity.

“Maybe they are in short term dire straits and so want payments as low as possible, but with the idea that this is a temporary fix and that they would refinance.”

Hartmann points to the math on CFFC’s sorted.org.nz that graphically demonstrates that interest payments over the life of a 40 year loan would be more than double that over a 20 year loan.

Both Bolton and Hartmann out that long mortgage terms were a worrying sign of the poor quality of sub-prime mortgages in the years before the crash of the GFC, so extending time frame not a good sign this time around either.

“These are riskier products, it’s also far more expensive,” Hartmann says. “People view it as temporary, but if they stay in it longer because of changes in market conditions, or personal circumstances that’s a lot of interest.”

Hartmann points out that New Zealand mortgages have generally hovered around 25 to 30 years, and that we also have a culture of paying down mortgages.

Bolton says paying off a mortgage faster means building equity into a property faster, and that’s the smarter move than spreading lower payments over a longer term.