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Banks will allow you to extend your mortgage term, at a cost. Picture: Damian Shaw
ANALYSIS
The debt trap just got harder for many Australians to climb out of, with rising interest rates and ongoing inflation putting borrowers under extreme pressure.
Mortgage stress is on the rise, borrowing power is falling and things look like getting worse before they get better, with the RBA poised to hike the cash rate at its May meeting and again over coming months.
MORE:Inflation crushes any hope of rate relief
Australians love their homes, however, and will look for ways to alleviate pressure while still hanging onto their greatest asset.
Enter the ‘loan extension’.
New research from money.com.au has revealed more and more homeowners are pushing their mortgage debt further into the future, by adding years to their home loan terms, as a way to avoid increasing their monthly repayments.
RBA Governor Michele Bullock is tipped to announce a May rate hike. Picture: Gaye Gerard
The national survey of more than 1000 borrowers revealed 30 per cent of respondents would consider extending their loan term by one to three years to cope with rising repayments if rates were to increase further.
MORE: Albo’s ‘help’ may be making housing crisis worse
An alarming 19 per cent said they would reset their loan back to a full 30-year term given the opportunity, potentially undoing years of hard fought progress on their ownership dream.
Money.com.au mortgage spokesman Nick Burgess said the desperate focus on short-term repayment relief may keep a borrower’s head above water, but it would come at a far greater cost down the track.
“A lot of borrowers default to extending their loan term in high-interest environments to reduce their monthly repayments, but they often underestimate how much more interest they’ll pay over the life of the loan,” Mr Burgess said. “It’s a way of kicking the can down the road to ease pressure now while everyday costs like fuel, groceries, insurance and utilities continue to rise. A lot of households are feeling the squeeze from all sides, and for many, stretching out their mortgage feels like one of the few levers they can pull right now.”
“Extending your loan term or switching to interest-only repayments can offer immediate breathing room through lower monthly repayments, but it often comes at the expense of thousands of dollars in additional interest over time.”
MORE:RBA set to unleash double rate hike
Money.com.au spokesman Nick Burgess.
Average borrowers at today’s variable home loan rates will pay the purchase price all over again in interest over the life of a loan.
A $700,000 loan at a 6 per cent repayment rate will pay $653,000 in interest to the bank over a 25 year loan term, or about $810,000 in interest over a 30 year term. So the difference is significant.
While that borrower could save $325 a month by extending to 30 years from 25, the total interest bill would skyrocket by $157,000.
If that borrower added two years instead, to make it a 27 year loan, it would save $142 monthly but add more than $62,000 in cumulative interest.
A further 13 per cent of survey respondents said they would consider switching part or all of their loan to interest only repayments. Generally, there are lenders that will allow borrowers to do this for up to three years.
This would cut monthly cost by $1010 for that $700,000 loan, but add more than $35,000 to the overall loan.
“Switching to interest-only repayments fundamentally changes how the loan works because you stop paying down the debt altogether during the interest-only period,” Mr Burgess said. “While it can deliver the biggest short-term reduction in repayments, it can lead to higher costs and a sharp jump in repayments later on.”
Of the different age groups, Gen Z (44 per cent) and Millennials (38 per cent) were the most likely to extend their loans by one to three years.
Gen X (23 per cent) were most likely to reset their loan term back to 30 years, while Millennials (15 per cent) were the most likely to consider switching to interest only.