Loans

There already is a lender in Australia who lends over 40 years, not fixed though.

[email protected]

arg i knew it would be something simple ,
Thanks Mortgage Hunter []

The thing which appears to have been overlooked in the above posts is the fact that one virtually boxes oneself into a corner when taking a long term loan with interest fixed for the life of the loan.

Forty years is sure a long time and if ever one’s circumstances change and one wants to (or needs to) dispose of the property one may be in for a rude shock !!

If, at the time when you want to pay out the loan prematurely, the fixed rates are below the rate which you yourself are locked into then the lender would be looking to charge you compensation for what they term ‘economic loss’ i.e. the difference between the fixed rate at the time and the rate you are locked into.

Imagine the penalty you would have to pay if you are locked into a 40 year loan and five years later you want to sell the property.

If you are locked into a 7.5% rate and the rate at the time is say 6.5% the bank will be looking to recoup from you the economic loss i.e. 35 years X 1.0%= 35 % of the loan amount.

The average life of a home loan is about seven years so I seriously doubt that a 40 year loan would be advantageous for most people.

The idea that a 40 year Line of Credit would solve the problem is absurd as well for three reasons :

1. a Line of Credit would defeat the purpose of trying to lock in a rate. The L.O.C. rate changes from time to time in line with the general market.

2. a lender may require you to update on say a yearly basis the financial data they have on you. Imagine that you happened to be out of work that moment. The L.O.C. would be called up like a flash.

3. Even worse, the Line of Credit can be called up at anyonetime by the lender for whatever reason so where lies one’s security ?

Yes, going into a 40 year loan arrangement does provide stability as far as the loan is concerned. But at what price ? Remember the possible ‘economic loss’ penalty ?

Who of us can predict what happens in one’s future ?
There are many reasons which may force one to to dispose of the property.

Pisces133
Auspacific Finance Pty Ltd

I have had an LOC for many years and have never been asked to submit financials for a review.

The idea of a LOC was not to have a fixed rate – which you can do, but would sort of defeat the purpose I suppose – but to enable interest only payments for the entire period if that’s what you wanted, and would help increase affordability.

Regarding the break costs on a fixed 40 year loan. Again, Matt’s question was about locking in the rates at a low point. I would have been more than happy to lock my rates in for 40 years at 7%. I doubt that rates would be ‘significantly’ lower than that for an extended timeframe in the 40 year period.

Cheers
Mel

Yep, Pisces, I reckon I still would. Cos I don’t see that happening in the ‘near’ future, and so I reckon I’d get in a few good years where my 7% was lower than the standard, and so by the time the rates did get low (and I just can’t see it happening here – but doesn’t ‘everybody’ say that[:p]) I would have a smaller loan, and more income either job wise (PPOR) or rent (IP) or both.

Cheers
Mel

Pisces, I reckon there would have to be some serious deflation before incomes were actually lowered. Especially for public servants, of which I am currently still one.

Also, as I said, I don’t expect the rates to be that low for a considerable period, by which time my properties will be well and truly +ve, so it wouldn’t matter if they did drop by some amount.

Cheers
Mel

Yes, G.E. has very attractive rates guys. [V]

Why would you possibly want a 40 year loan S.I.S. ?
One cannot afford to lock in the rate for such a long time for obvious reasons and if it is a Variable Interest loan the lender has usually the right to call up the loan anytime they so wish so what’s the point ?

Pisces133

G.E.’s rates are a lot higher than the rates from your friendly bank.

Pisces133

A few points on the topic of US loans and fixed rate loans:

The US market can offer 30 year fixed rate loans as their wholesale capital markets take a different approach to funding mortgage assets and assume the risk that the borrower may refinace out of the loan before the 25 years are up…note: there is no penalty costs for early exit in the US and you can break a loan at any point and go into a lower interest rate loan and the lender takes the risk that he will lose future income …this is how the NAB lost $2billion dollars on Homeside …their US mortgage business. As US interest rates fell the borrowers refinace away and they didn’t do thier sums as to what this cost them in lost renenue.

There is a concept called “negative convexity” which any American 1st year uni text book covers very well but which they seemed to be unaware of.

Our wholesale capital markets do not accept this risk and look to recoup any lost income from the borrower.

As for the banks “just taking a guess as to where interest rates will be ” that is 100% wrong. There is a well established interbank market where forward interest rates can be traded out to approx 10 years (have a look in the markets section of the Fin Rev for “Swap Rates”). Any longer than this is difficeult in Australia.

Interest rates are genearlly higher the further you go out since about 1992 but there was a period where wholesale rates where lower the further you went out in years.

Will we move to a situation where we can access 25 year fixd rate loans???…maybe one day but it has been normal in the US for at least 50 years (probably more) and it is yet to reach here…so don’t hold your breath.