Mortgage holders reducing monthly repayments adding years to borrowing term

Mortgage holders reducing their monthly repayments to cope with rising interest rates could be adding hundreds of thousands of dollars to their debts.

Thirteen per cent of Australian mortgage holders have extended the length of their home loan in the last 12 months, according to a new survey conducted by Finder.

Research suggests this could add years to a borrowing term and cause repayments to go up by more than $21,000 a year on average since April 2022. 

Seven per cent or around 231,000 have extended their loans by less than five years, while 6 per cent though have increased their loans by more than five years to afford their repayments.

“Extending your loan like that can drop your repayments by even $100 or $200 a month, which for a lot of people really makes a huge difference,” Finder’s Richard Whitten told 9News Queensland.

Experts have warned this could potentially end up costing homeowners a lot more in the long-term.

An extra five years adding more than $147,000 in additional interest to the average loan of $625,050 that’s based on a variable rate of about six per cent.

For those with a million dollar mortgage, this could mean an extra $234,000 in interest over 35 years.

However some mortgage brokers said there are benefits to this approach.

“It’s going to cost you a few more bucks in interest, but long term I think you’ll be far better off if you can keep your house,” mortgage broker George Samios said.

Homeowners are advised to make up the difference when there is more money coming in.

Cash rate could increase again

The latest minutes from the Reserve Bank of Australia June meeting shows the board ar ready to increase rates if inflation expectations change.

At the meeting, which was led by RBA governor Michele Bullock, the board shared concerns about rising prices and the challenge to bring inflation back to a target band of two to three per cent.

“Members judged that longer term inflation expectations in Australia were still anchored but should continue to be monitored closely,” the minutes said.

“Several measures of inflation expectations had drifted up in recent years to be around the midpoint of the target band, after having been below target during the low-inflation period prior to the pandemic.

“Part of the increase in market-implied measures of inflation compensation over preceding years appeared to reflect larger premia to compensate for the risk that inflation turned out to be higher than expected.

”Members acknowledged that if inflation expectations were to rise materially from current levels, it could require significantly higher interest rates to bring inflation back to target, with adverse implications for growth in output and employment.”