ubank extends refinancing loan term to 35 years – what could this mean for you?

ubank has announced it is extending its loan term for refinances from 30 to 35 years as of 7 February 2023. While this could potentially prove beneficial for homeowners seeking some relief from relentless rate rises, it could also potentially cost these customers more in the long run.

According to ubank, while 35-year terms have always been available for home purchases using its home loan products, these have now been made available to both refinance and purchase applications. 

How does a 35-year mortgage work?

The length of your loan term can affect your home loan repayments almost as much as your interest rate.

The longer your loan term, the less you’ll pay month to month. By dividing your mortgage principal up into a larger number of repayments, each repayment will cover a smaller portion of your overall balance. The reverse is also true – a shorter loan term means making a smaller number of repayments, each for a larger portion of your principal.

However, because interest is charged on each repayment you make, a longer loan term with a larger number of repayments means you’ll be charged more interest in total than you would with a shorter loan term.

For example, here’s how the monthly principal and interest repayments on a $400,000 mortgage with an interest rate of 4% or 5%, paid over a term of 30 or 40 years would add up:

Source: RateCity. Calculations are estimates for illustrative purposes only, and do not account for fees, charges, or interest rate changes over time.  

Most home loans in Australia start on terms of between 20 and 30 years, striking a balance between keeping repayments affordable and minimising long-term interest charges for borrowers. You can find longer loan terms of 35 and 40 years, though they are relatively rare.

When refinancing a home loan, it’s often worth considering the loan term alongside the interest rate. For example, if you were 10 years into repaying a 30-year mortgage, then refinanced to another 30-year loan, you may 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.

What could this mean for Australian mortgage holders?

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, with record numbers looking to refinance.  

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. But by further extending their loans, this means they may be in debt and paying interest for longer, costing them more money over time.

It’s also worth keeping in mind that Australia’s fortunes may change in the future, with some lenders predicting rate cuts could arrive by late 2023 or 2024. Borrowers who refinance to 35 year loans could have the option to make extra repayments to clear their mortgage principals sooner, even exiting the loan early and saving on interest costs. Depending on how your financial situation changes, you may also consider refinancing to a shorter loan term in the future.

Before you refinance to a 35-year mortgage, compare home loans and calculate your costs to work out if this may be the best option for your needs. You could also consider contacting a mortgage broker for more specific advice.

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