Struggling homeowners are increasingly hitting the costly reset button on their loans in hopes of lowering their monthly payments.
You’re adding years to the life of your loans and potentially hundreds of thousands of dollars in interest costs.
A recent Finder.com.au survey revealed that one in eight mortgage holders surveyed had extended their home loan to reduce their repayments over the last year.
In a trend described as “borrowers caught in mortgage quicksand,” about half of those who had extended their loans had added more than five years to the life of the debt.
This would result in much higher interest costs over the life of the loan, despite cheaper monthly payment bills in the short term, Finder revealed.
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Many expected RBA Governor Michelle Bullock to announce a cut as early as June, but it now looks likely that rates will not be cut until the end of the year. Image: NewsWire
Stressed households were taking these extreme measures due to an average increase of $16,788 in their annual mortgage payments from April 2022, the first of 13 Reserve Bank cash rate increases.
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Finder’s Consumer Sentiment Tracker revealed that 36 per cent of Australians struggled to pay their home loan in May 2024, up from 24 per cent in May 2022.
This comes as economists warned mortgage holders were unlikely to see a rate cut until at least the end of the year.
AMP chief economist Shane Oliver said there would be little reason for the RBA to change rates in the short term.
“Following the recent higher-than-expected inflation data, the RBA still lacks the confidence to start cutting rates and will therefore hold firm over the next few meetings, although risks remain to the upside for rates. But weaker growth and lower inflation should allow for a cut by the end of the year,” he said.
The RBA has increased the interest rate 13 times since April 2022.
Saul Eslake of Corinna Economic Advisory said: “I think it would take a lot – a ‘material’ rise in the core inflation rate in the near term… to prompt the RBA to raise rates again.”
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New analysis showed that paying off the average Australian loan of $625,050 over 30 years would result in interest payable of $722,602.
This implied an interest rate of 5.99 per cent, one of the cheapest rates currently offered.
Extending this to 35 years would add an additional $147,457 to the total interest over the life of the loan.
For a borrower with a $1 million mortgage, interest skyrocketed from $1,156,066 over the life of a 30-year loan to $1,391,980 over 35 years.
Mortgage payments have been eating into homeowners’ disposable income.
Finder home loan expert Richard Whitten said the move was a drastic measure.
“While it will reduce their monthly payments in the short term, it will probably cost them a fortune in the long term,” he said.
“The disposable income of the average Australian household has fallen significantly over the past 12 months and Australians are looking for ways to cut their monthly spending even if it means jeopardizing their long-term financial health,” he said.
Women were slightly more likely than men to have added years to the length of their home loan to save money in the short term, Finder’s research showed.
“Because lenders calculate interest daily based on the outstanding balance of a loan, over time that adds up to a significant additional interest burden,” Whitten said.
“Even a small increase in the length of a loan term can create large differences in interest over the life of a mortgage loan.”
Homeowners have been advised to seek advice before topping up their loans.
Whitten urged those who extended their loans to be aware of long-term interest costs and find ways to pay off their debts faster when they can afford it.
“When you’re in a bind, you need lower payments right now. But if you’re in a position to do so, consider investing extra money into your home loan to offset the additional costs that come with extending your loan.
“Most variable mortgages have a repayment mechanism, so homeowners can make additional payments and still have access to those funds in an emergency.
“If your loan has an offset account, it’s even better. “You can put your extra savings there, get the full benefit of offsetting interest charges, and have full access to the money whenever you need it.”
