United States President Donald Trump has raised the idea of a 50-year mortgage term to help first-home buyers – but would it work for New Zealanders trying to buy houses too?
Media reported that Trump wants the government to back a 50-year mortgage option that would help address concerns about housing affordability.
Federal Housing Finance Agency director Bill Pulte reportedly said it was “a complete game changer” for home-buyers.
But is it actually a solution?
Ed McKnight, economist at property investment firm Opes Partners, said it could be an expensive one over the long term, although there would be some immediate repayment savings.
He calculated that for every $100,000 of home loan a borrower had, the payment on a loan at 5% interest rate would be $19 lower per week lower with a 50-year term than a 30-year one.
“A $600,000 mortgage would save $114 a week in repayments.”
Home-buyers would also be able to borrow about 13% more. Investors might be able to borrow an extra 20%, he said.
But the flipside of this would be that the loan overall would become a lot more expensive.
The longer a loan term, the more interest you have to pay overall.
McKnight calculated that it could mean paying $172,000 in interest on every $100,000 of home loan borrowed, compared to $93,000 on a 30-year home loan.
“One of the things I’ve thought for a while is if home ownership is becoming more expensive, because house prices keep going up, what are the different levers that banks or the government could pull in order to make it slightly more affordable?
“Paying the loan off over a longer period might be one of those levers.”
But he said it was substantially more expensive.
“I’m going to take over 60 percent longer to pay off my mortgage but I can only borrow an extra 20 percent if you’re an investor or less than that if you’re an owner-occupier.”
It would help people who were on the cusp of mortgage affordability, he believed. But it could also contribute to rising house prices.
“If you allow people to borrow 10 percent more money or 20 percent more money, it doesn’t necessarily mean that all goes straight into higher house prices and they are 10 percent tot 20 percent higher than they would otherwise be.
“But it is absolutely certain that it would lead to some amount of house price inflation and some of that money would flow through into higher house prices because you’ve got more money in the system but the same number of houses.
“You might get a few more houses being built because you’ve got some extra demand but initially you would except to see a house price bump.”
While New Zealand borrowers usually take out home loans over a 30-year term, many people pay them off more quickly.
A survey of the banks by RNZ showed significant numbers had paid off more than they needed to – in some cases up to 65% of customers.
David Cunningham, chief executive at mortgage broking firm Squirrel, said he thought most people took 25 to 30 years to get from buying their first home to making their final mortgage payment, probably on a different house.
“The average age for a first-home buyer is around 36 and it’s those last few years pre-retirement where the big reductions in the mortgage happen.”
People would usually increase their mortgage payment as their income rose over time, he said.
“Pretty consistently most but not all homeowners hit retirement with minimal or no mortgage.”
