High cost of living leads to spike in mortgage extensions

Economists are split on the next move by governor Michele Bullock and the RBA board. Picture: NewsWire / Nikki Short

How have mortgage holders coped with rising rates and sky-high property prices?

New data suggests an increasing number of people are resorting to one of the oldest and most expensive strategies – they are ­extending the length of their home loans.

What’s more, as last week’s shock inflation figures renew the threat of further rate rises, there is now an elevated risk more homeowners will opt to make their mortgage run longer – incurring huge extra costs.

A survey from the Finder group this week shows that an estimated 430,000 mortgage holders – or 13 per cent of the market – have opted to extend their mortgage as a way to deal with the cost of living in recent months.

For the average home loan borrower with a $625,000 loan, a typical extra five years means an extra $147,000, which must be paid to the bank over the extended life of the loan.

The figures coincide with parallel work from the RBA that shows that the high cost of homes – and elevated mortgage rates – means that the portion of household income dedicated to mort­gage repayments is now at 10.4 per cent, the highest level since the Global Financial Crisis.

The RBA figures also suggest that while people are expanding their exposure to home loans (often through extending their terms), there is a downward trend in the use of personal credit.

One consolation for homeowners is that while rates have stayed high – and may go higher in the months ahead – the average house price rose by about 8 per cent in the 12 months to June 30. This works out at a boost of about $59,000 in the last 12 months in homeowner capital values.

House prices are also due to keep going higher this calendar year, with the PropTrack group forecasting they will increase by between 2 per cent and 5 per cent.

Unfortunately, the price rises are set against rising mortgage rates, which means home loan borrowers may have more valuable homes but in reality many are joining the ranks of the “asset rich and cash poor”.

“It’s the first time we have surveyed on the question of mortgage extensions, but it’s clear that more people are finding the need to do this,” says home loan expert Richard Whitten at Finder who estimates the average borrower saves $183 a month extending a home loan from 30 years to 35 years.

Piling up mortgage debt to improve the short-term outlook is not for everyone.

According to Stuart Wemyss of ProSolution Private Clients: “Extending the term of a loan for an owner-occupier can often mean kicking the can down the road. It might signal a time that new compromises have to be made.”

Fears that rates may go even higher were triggered by last week’s inflation figures that saw the annualised inflation rate stubbornly high at 4 per cent. In turn, this affected trading in the money markets. Traders in the money market are now pricing in a strong chance of a 0.25 per cent rate rise by November.

Economists are split on the next move by governor Michele Bullock and the RBA board, but the chance of a rate cut before Christmas – a consensus view at the start of the year – has faded.