Key implication: Extending mortgage terms to 40 years widens the front door to home ownership in a high‑price, high‑rate market—but it also stretches risk across the system. The winners will be lenders that pair longer terms with tight suitability rules, disciplined pricing and clear refinance pathways. The laggards will chase volume without guardrails and invite regulatory intervention.

The signal: Longer loans move from fringe to feature

Great Southern Bank’s move to offer a 40‑year term to first‑home buyers (with age limits) formalises a trend already visible among non‑banks and mutuals. Pepper Money, RACQ Bank and select customer‑owned banks have marketed 40‑year terms or variants for targeted segments, signalling a broader shift rather than a one‑off experiment. With mortgage brokers now originating more than 70% of Australian home loans, product design changes can scale quickly through broker channels.

Context matters. Australia’s outstanding housing credit sits around A$2.2 trillion (RBA), the cash rate is 4.35% (late 2024), and affordability is strained despite income growth. In other markets, longer terms became mainstream as prices outpaced wages: in the UK, the share of first‑time buyers taking 35‑plus‑year terms surged in 2023. Australia is now edging down a similar path.

Borrower economics: Lower repayments, higher lifetime cost

Longer terms reduce monthly repayments but increase total interest and slow the pace at which borrowers get below critical loan‑to‑value (LVR) thresholds.

• Illustrative math: On a A$600,000 variable loan at 6.5%, a 30‑year term implies about A$3,790 per month; a 40‑year term drops that to roughly A$3,510—around 7–8% lower. Over the life of the loan, total interest rises by approximately A$320,000 (+40% versus 30 years). At different rates, the monthly saving might be 6–10%, with lifetime interest up 30–50%.
• Equity build: Slower amortisation keeps borrowers above 80% LVR for longer, constraining refinance options and heightening negative‑equity risk if prices slip.
• Serviceability buffers: APRA expects banks to assess at least 3 percentage points above the rate. A longer term helps pass the buffer, but the underlying debt burden remains substantial.

Consumer researchers, including Finder’s Graham Cooke, have noted the trade‑off: a longer term can create cash‑flow headroom and borrowing capacity, but materially raises lifetime cost. The product suits borrowers with volatile near‑term cash flow who have realistic prospects to refinance or accelerate repayments—less so those at the limit with no plan beyond minimums.

Lender economics and balance‑sheet strategy

For lenders, 40‑year terms are a margin and duration play:

• Net interest income (NII): Lower monthly repayment doesn’t reduce outstanding balances as quickly, lifting interest income persistence, all else equal. Actual average life may still be 4–7 years due to refinancing churn.
• Risk‑weighted assets (RWA): Under APRA’s capital framework, mortgage risk weights hinge on LVR, borrower characteristics and underwriting quality more than contractual term. However, slower amortisation keeps LVRs higher for longer, potentially nudging modelled loss given default (LGD).
• Interest‑rate risk and optionality: Longer terms extend duration and prepayment optionality. In a falling‑rate cycle, prepayment speeds could spike, compressing realised returns; in a rising‑rate cycle, extension risk grows.
• Customer lifetime value (CLV): The hook is strategic: win first‑home buyers early, cross‑sell deposits and insurance, and retain through life events. CLV gains vanish if suitability is weak and arrears rise.

Competitive landscape: A new front in the mortgage rate war

Expect a two‑speed response. Challenger banks, non‑banks and mutuals will use 40‑year terms selectively to carve out first‑home buyer share in the A$2.2 trillion market. Major banks—already pulling back on cashbacks and sharpening risk pricing—may test variants with stricter guardrails (lower max LVRs, principal‑and‑interest only, tighter age caps) to protect brand and regulatory standing.

Product innovation will cluster around three levers: (1) term flexibility—automatic step‑downs from 40 to 30 years when income rises; (2) repayment accelerators—offsets/redraws and scheduled principal top‑ups; and (3) broker tooling—side‑by‑side lifetime cost disclosures embedded in suitability assessments. Distribution power matters: with brokers controlling the funnel, lenders that arm brokers with transparent, data‑rich comparisons will win share without racing to the bottom.

Risk and regulation: Consumer outcomes and system stability

Extended terms concentrate three risks:

• Consumer harm risk: Borrowers may anchor on lower monthly repayments and underestimate lifetime cost. ASIC’s credit guidance (RG 209) and the National Consumer Credit Protection regime require robust suitability testing; clearer lifetime cost disclosures are prudent.
• Macroprudential risk: Slower amortisation keeps system‑wide LVRs elevated. Combined with high debt‑to‑income (DTI) ratios, this could increase loss severity in a downturn. APRA’s 3‑point serviceability buffer remains a key backstop; a targeted macroprudential cap on very long terms for high‑DTI borrowers is conceivable if risks build.
• Lenders mortgage insurance (LMI): Higher LVR persistence shifts risk to LMI providers for longer. Expect LMIs to adjust pricing or impose tighter criteria on 40‑year terms.

International experience offers cautionary tales. Spain’s pre‑GFC 40‑year boom amplified losses when prices fell. The UK’s recent surge in >35‑year terms has triggered calls for clearer disclosures. Australia can get ahead of this with standardised lifetime‑cost and equity‑trajectory illustrations at point of sale.

Implementation reality: Underwriting, broker guidance, and product controls

Operational discipline will decide whether 40‑year loans are an affordability valve or a mis‑selling risk.

• Underwriting policy: Cap terms by borrower age and verified retirement plans; restrict high DTIs (e.g., >6x) from taking 40‑year terms unless strong mitigating factors exist; prefer principal‑and‑interest with no interest‑only periods.
• Product guardrails: Lower max LVRs on 40‑year terms; require offset or redraw features; auto‑convert to shorter terms when buffers exceed thresholds.
• Broker enablement: Mandate side‑by‑side 30‑ vs 40‑year comparisons showing (a) monthly savings, (b) total interest, (c) time to reach 80% LVR. Provide scripts and calculators; audit files for evidence of informed consent.
• Collections early‑warning: Use transaction analytics to spot stress early; offer repayment acceleration or refinance pathways as income rises.

Outlook and scenarios: What the next 24–36 months could look like

Base case (most likely): Penetration of 40‑year terms rises modestly among first‑home buyers via challengers and mutuals; majors adopt cautiously. Pricing remains disciplined; regulators monitor but do not intervene beyond disclosure expectations.

Upside case: If rates drift lower and prices keep climbing, longer terms become a mainstream first‑home buyer feature. Lenders package step‑down terms and automated accelerators; arrears stay contained; broker‑assisted education normalises lifetime‑cost trade‑offs.

Downside case: Price correction or unemployment shock exposes slow amortisation; negative equity rises in high‑LVR cohorts. APRA tightens macroprudential settings (e.g., caps on long terms for high‑DTI or high‑LVR loans); lenders pare back offerings.

Executive actions now:

• Lenders: Pilot with tight eligibility; embed lifetime‑cost disclosures; monitor cohort performance monthly; align LMI terms upfront.
• Brokers: Document suitability beyond repayment affordability; set default advice to “accelerate when able” and diarise check‑ins at 12/24 months.
• Regulators: Standardise disclosure templates for long‑term loans; stress‑test long‑term, high‑DTI segments; ready targeted, not blunt, macroprudential tools.
• Borrowers and employers: Encourage salary‑linked repayment boosts as incomes rise; treat 40 years as a starting term, not a destiny.