Choosing the Right Home Loan Term: 25, 30 or 40 Years?

Home Loans

8 Oct

Choosing the right home loan term is one of the biggest decisions you will make when getting a mortgage. The term you pick affects your monthly repayments, how much interest you pay over the life of the loan, how quickly you build equity, and whether you might still be paying the loan into retirement. I’m a mortgage broker, not a financial adviser, so I’ll explain the practical trade-offs you should consider and what most brokers and lenders are saying right now.

What the different terms mean: 25, 30 and 40 years

A 25-year term means higher monthly repayments but less interest paid overall and faster equity build-up. A 30-year term lowers your monthly repayments compared with 25 years but increases total interest and slows equity growth. A 40-year term reduces monthly repayments further and can improve short-term affordability, but it usually leads to the highest lifetime interest and the slowest equity accumulation. Many lenders still offer standard 25 or 30 year products while a growing but small number of lenders now provide 40 year options.

Affordability now versus cost over time

If your priority is keeping monthly cashflow comfortable - for example when you are early in your career or juggling family costs - a longer term can help you qualify for a loan and free up money for other uses. However the trade-off is clear: the longer the term the more interest you pay in total and the longer you stay in debt. For many borrowers that extra interest runs into tens or hundreds of thousands of dollars on typical loan sizes. Recent Australian analysis and broker commentary highlights that 40 year loans can reduce monthly repayments noticeably but can add very large sums to total interest paid unless you make extra repayments.

Equity, flexibility and future borrowing

Shorter terms help you build equity faster, which is useful if you want to refinance, borrow against the property for renovations, or sell with a good deposit. Longer terms slow equity growth and can leave you with less borrowing power if you need finance later. If you plan to make additional repayments or use an offset account, a longer contractual term can be manageable because those extra repayments reduce interest and speed up principal repayment. But you must be disciplined to make those extra payments.

Interest rates and product availability

Some lenders may charge slightly different rates for longer-term products, or restrict which loan types can be stretched to 40 years. Also there are fewer 40 year products to compare, which can make it harder to find competitive pricing. Lenders and brokers advise checking both the advertised term and how easy it is to make extra repayments or switch to a shorter amortisation later.

Who each term typically suits

25 years: Suits borrowers who can afford higher monthly repayments and want to minimise interest and repay sooner.
30 years: A balanced option for many households that want manageable repayments but prefer to avoid excessive long-term interest.
40 years: May suit first home buyers struggling with serviceability or buyers who need maximum short-term affordability. Use caution because the loan can extend into retirement years and increase lifetime interest costs.

Conclusion

There is no one-size-fits-all answer: the right term depends on your cashflow today, your plans for future repayments, and how much total interest you are willing to pay to reduce near-term pressure. Shorter terms save money over the life of the loan and build equity faster. Longer terms improve short-term affordability but increase lifetime interest and may leave you servicing debt for longer. As a mortgage broker I can help run the numbers on your specific situation so you can see the monthly and lifetime cost difference between 25, 30 and 40 year options and choose the term that suits your goals.