Rates decision: Loan mistake costing homeowners a ‘fortune’

Stressed homeowners are tweaking a feature of their mortgages to mitigate higher interest rates, but it’s backfiring, loan experts warn.

Struggling homeowners are increasingly hitting the pricey reset button on their loans in the hope of dragging down their monthly repayments.

It’s adding years to the length of their loans and potentially hundreds of thousands of dollars in interest costs.

A recent Finder.com.au survey revealed one in eight mortgage holders polled revealed they had extended their home loan to lower their repayments over the last year.

In a trend described as “borrowers stuck 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 lifetime of the loan, despite cheaper monthly repayment bills in the short-term, Finder revealed.

Many had expected RBA governor Michelle Bullock to announce a cut as early as June, but now it looks likely rates won’t be cut until the end of the year. Picture: NewsWire

Stressed households were taking these extreme measures because of an average $16,788 rise in their annual mortgage repayments since April 2022 – the first of 13 cash rate rises from the Reserve Bank.

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Finder’s Consumer Sentiment Tracker revealed 36 per cent of Australians struggled to pay their home loan in May 2024 – up from 24 per cent in May 2022.

It 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 recent higher than expected inflation data the RBA still lacks the confidence to start cutting rates and so will hold for the next few meetings, with the risks still being on the upside for rates. But weaker growth and lower inflation should allow a cut by year end,” he said.

The RBA has raised the cash rate 13 times since April 2022.

Saul Eslake of Corinna Economic Advisory said: “I think it would take a lot – a ‘material’ increase in the underlying inflation rate in the near term ... to prompt the RBA to raise rates again”.

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New analysis showed paying off the average Australian loan of $625,050 over 30 years would make $722,602 interest payable.

This assumed an interest rate of 5.99 per cent, one of the cheaper rates currently on offer.

Pushing this out to 35 years would add $147,457 extra to the total interest over the life of the loan.

For a borrower with a $1 million mortgage, the interest soared from $1,156,066 over the life of a 30-year loan to $1,391,980 over 35 years.

Mortgage repayments have been eating into homeowners’ disposable income.

Finder home loans expert Richard Whitten said the move was a drastic measure.

“While it will reduce their monthly repayments in the short term it will likely cost them a fortune over the long run,” he said.

“The disposable income of the average Aussie household has fallen significantly over the past 12 months and Aussies are looking for ways to slash their monthly outgoings even if it means jeopardising 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.

“Since lenders calculate interest daily based on the outstanding balance of a loan, over time that adds up and is a significant extra burden in interest,” Mr Whitten said.

“Even a small increase in the length of a loan term can add up to big differences in interest over the life of a home loan.”

Homeowners have advised to seek advice before topping up their loans.

Mr Whitten urged those who extended their loan to keep an eye on the longer term interest costs and find ways to pay their debts down faster when they can afford to.

“When you’re stretched, you need lower repayments right now. But if you find yourself in a position to do so, consider putting extra money into your home loan to make up for the extra costs that come with extending your loan.

“Most variable mortgages have a redraw facility, so homeowners can make extra repayments and still get access to those funds in an emergency.

“If your loan has an offset account it’s even better. You can park any extra savings there, get the full benefit of offsetting the interest charges and have complete access to the money when you need it.”

Originally published as Rates decision: Loan mistake costing homeowners a ‘fortune’