Australia's 'Extend and Pretend' Mortgage Strategy: A Temporary Fix with Long-Term Risks

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In response to escalating housing affordability challenges, Australian lenders are increasingly adopting 'extend and pretend' mortgage strategies. These approaches, including 40-year loan terms and extended interest-only periods, aim to provide immediate relief to borrowers but may introduce significant long-term financial risks.

The Rise of Extended Mortgage Terms

Recent data indicates that Australia's housing affordability reached record lows at the end of 2024, with the dwelling value-to-income ratio hitting 8.0 and median mortgage repayments consuming 50.5% of household income . To address this, lenders have introduced 40-year mortgages, some exclusively for first-time buyers. These extended terms lower monthly repayments and increase borrowing capacity—by up to $24,000 for individuals and $48,000 for couples on median incomes .

However, while these measures offer short-term affordability, they significantly increase the total interest paid over the life of the loan. For instance, extending a $500,000 mortgage from 25 to 40 years can add over $336,000 in interest .

Interest-Only Loans: Immediate Relief, Deferred Costs

AMP's introduction of a 10-year interest-only home loan without mid-term reassessment exemplifies another 'extend and pretend' tactic. Targeted at a broad borrower base—including retirees and investors—this product offers immediate cash flow benefits but delays principal repayment, potentially leading to prolonged debt burdens .

Implications for the Housing Market

These lending practices may inadvertently inflate housing demand and prices, exacerbating affordability issues. By enabling higher borrowing capacities, they risk driving up property values, making homeownership even more elusive for many Australians.

While 'extend and pretend' mortgage strategies provide temporary relief, they may lead to increased long-term financial strain for borrowers and further distort the housing market. Policymakers and financial institutions must carefully consider the broader economic implications of such lending practices to ensure sustainable housing affordability.