A 40-year mortgage sounds like an attractive option: lower monthly payments, easier to qualify for, and you can finally become a homeowner. But before you sign anything, it’s important to understand what a long loan term really costs. The Bank of Finland has already warned that new mortgage regulations could lead to significantly higher debt levels, especially among first-time home buyers. OUN® doesn’t sell you a home and doesn’t receive any commission. We’ll tell you what others leave unsaid.
The interest is almost as much as the loan itself
According to Yle’s calculations, on a 40-year mortgage, you’ll pay nearly as much in interest as the principal amount of the loan itself. This isn’t just rhetoric. It’s math.
Doubling the term of a loan doesn’t just double the repayment period. It doubles the time over which interest accrues. Every year you extend the loan term is another year of interest for the bank.
The lower monthly payment is real. But the total cost of the home is in a completely different league than with a 20- or 25-year loan. First-time home buyers rarely crunch the numbers before closing the deal. The situation becomes clear once you start exploring different options.
What happens when interest rates rise?
Yle has calculated how rising interest rates affect loans of different durations. For a long-term loan, the impact of interest rate sensitivity is greater simply because the loan term is long and the principal decreases more slowly.
In the first few years, you’ll mainly be paying interest, not principal. If interest rates rise during that time, your total monthly payment could increase significantly without your mortgage balance decreasing much at all.
40 years is a long time. Interest rates have fluctuated several times during that period.
The risk associated with housing company maintenance fees is an issue that isn’t discussed enough
When calculating your housing costs, remember that your monthly mortgage payment is only part of the picture. Your housing company fees can rise significantly due to renovations—such as plumbing renovations, facade renovations, elevators, and windows. In an apartment building, you’re bound to face these costs at some point.
If you’ve already extended your loan term to 40 years to buy a home, you may not have a financial cushion to absorb a large increase in maintenance fees. The situation can quickly change to the point where housing simply no longer fits into your budget.
Before making a purchase decision, you should at least determine the housing company’s maintenance needs for the next 10 years. This isn’t done often enough.
Debt is rising, even as the rules change
The Bank of Finland’s concern is well-founded. When lending rules change so that longer loan terms make it easier to obtain a loan, first-time homebuyers can easily end up taking on an even larger debt relative to their income. The monthly payment remains manageable, but the total debt increases.
Hypo’s housing market reports indicate that home prices have been falling steadily for several years now. If you buy a home with a 40-year mortgage at peak prices and home prices continue to fall, you’ll be in a situation for a long time where your home’s value is less than the amount of your loan.
This isn’t a disaster if you don’t have to sell. But there are times in life when you have to sell.
When Might a 40-Year Loan Be Justified?
We’re not saying that a long loan term is always the wrong choice. If you have a stable income and a realistic plan to pay off the loan faster during good years, it can work. But in that case, you need to actually have that plan in place—not just an intention.
On the other hand, if you take out a 40-year loan because that’s the only way to get a loan large enough, that’s a red flag. It means the home is too expensive for you right now.
- Find out about the housing company’s future renovation needs before making a purchase decision
- Calculate the total interest expense for the entire loan term, not just the monthly payment
- Stress-test your budget with a 2–3 percentage point increase in interest rates
- Check whether your loan allows you to make extra payments without incurring fees
OUN® analyzes properties from the buyer’s perspective, free from the seller’s interests. If you’re thinking about buying a home and want an independent assessment, get in touch or book a free half-hour online consultation before making any decisions.
Are you thinking about taking out a mortgage?
Use our calculator to see how different loan options fit into your budget. And once you’ve figured out your loan options and found the home of your dreams, make sure to carefully check whether it’s really the right choice for you.
OUN® reviews and analyzes the property on your behalf based on its documents and provides a plain-language analysis within 24 hours. We are 100% on your side, completely independent—we don’t sell the apartment to anyone.
