Calls for long-term mortgages from financial institutions meet with concern

It seems the world of finance is responding to the unsustainable boom in housing prices and the inability of young people to enter the market by extending the term over which the loan is repaid. In an ideal world, this means that the monthly repayments, and the pressure on families' budgets, would decrease considerably. Lender GE Money already offers a 40-year mortgage and reports today suggest at least two of Australia's major banks are considering offering 40- and 50-year options. Obviously, the longer the bank has the money, the more interest they collect, so the financial incentive for them to offer such plans is obvious.

Labor's Wayne Swan has told the ABC Insiders program that "people are up to their eyeballs in debt" and that he would be "extremely wary about another facility out there which encourages Australians to go further into debt".

My concern from an economic viewpoint is the result of reducing monthly repayments. The market works on supply and demand. If you reduce the amount that people are paying each month, their capacity to pay more per month increases, which puts strong upward pressure on prices and drives housing prices even more out of the market.

In addition, a 50-year loan taken at age 25 means that one would still be making full repayments at age 74. For many years there has been concerns about a looming crisis surrounding Australia's aging population and the effect this will have on the economy and the ability of older people to be sustained by a shrinking tax base of younger workers. Furthermore, many people die before age 74 - what happens to the debt then, or the people living in the not-yet-paid-for house? There's also the risk of a future flood of bank-owned property forcing prices down unnaturally and penalising those who are mortgaged to the hilt and wish to sell.

There are too many questions and not enough answers about this proposal. Too often, the banks and financial institutions act in a way which benefits their own bottom line while not representing responsible social behaviour.

Links:
50-year home loans plan finds support (ABC Online)
Labor wary of 40-year loans (ABC Online)