A 40-year mortgage is primarily designed to afford mortgagees lower monthly payments by stretching the amortization period significantly. While it is deemed a high-risk move by many financial analysts and advisors, it can be a tremendous benefit for those who are positioned to maximize its advantages. The low payments associated with the 40-year mortgage facilitate a host of other benefits.
♦ Low monthly payment
Despite the 40-year mortgage attracting a marginally higher loan interest rate, the actual monthly payment is lower. For example, use a $300,000 mortgage with a 40-year interest rate of 6.25%. The monthly payment would be $1,703. Compare the $1,703 to the monthly payment for a 30-year mortgage, which would have a reduced interest rate (6%). The payment for the 30-year mortgage would be $1,798. The 40-year mortgage costs $95 less per month.
♦ Reduced opportunity cost
A person who takes a 40-year mortgage has reduced opportunity costs. They have a lower monthly payment and likely have a lower down payment on the property. This means that they could make present investments that could redound to their benefit in future. While some might argue that the extra 10/ 15 years makes it unfeasible, remember that compounded interest works better over longer periods, and exponentially in the latter stages. Taking a more affordable mortgage in the present can give current investment a boost, but this only applies if the money saved is invested wisely and successfully.
♦ It facilitates a mortgage with a small down payment or no down payment
Normally, those applying for home loans seek to make an initial down payment to ease the burden of the monthly payment. Since the 40-year mortgage already reduces the burden somewhat, it is ideal for those who wish to avoid, or cannot afford, a large down payment. Those who are short of cash, buying a home early in their career or purchasing high-cost homes can benefit from this strategy.
♦ It reduces the carrying cost of a rental property
A home owner might mortgage a property for the purpose of renting. However, the cost incurred through a shorter mortgage is higher because the mortgagee has to repay the loan faster. Although the 40-year mortgage represents an increase in liability, the lower repayments mean that the expense incurred would be lower – especially in the absence of a large down payment. Given that another buyer could assume the mortgage later on, it is a good option if taking out a mortgage on a rental property – especially one that is likely to appreciate in value.
♦ Tax deductions
Unfortunately, only high-income earners can reap the rewards of having mortgage interest payments as a tax deductible for a longer period. Having this on one’s personal books for longer would increase tax savings, especially when the chargeable income is significant.
A 40-year mortgage might be a risky financial strategy, but it offers significant reward and savings for those who are positioned to benefit from it.