One in eight borrowers are stuck in ‘mortgage quicksand’ after extending their loan term in a bid to reduce their repayments.
A Finder survey of 1012 respondents – 292 of whom have a mortgage – revealed 13 per cent had extended the length of their home loan in the past 12 months to cope with rising interest rates.
Households paying the current average loan have seen their mortgage repayments rise more than $21,000 a year on average since April 2022 when rates started increasing.
Finder’s research found 7 per cent of mortgage holders (equivalent to 231,000 borrowers) had extended the term of their loan by less than five years.
Notably, 6 per cent have added five years or more onto their mortgage – with the interest implications potentially adding up to thousands of dollars over the life of the loan.
Home loans expert at Finder, Richard Whitten, said borrowers were having to take drastic measures to afford their mortgage payments.
“While extending the length of your home loan will lower your monthly repayments in the short term, it’s probably going to cost you a fortune over the long run,” Mr Whitten said.
“The average Aussie household has much less disposable income compared to a few years ago.
“Many are desperate for ways to slash their monthly outgoings, even if it means sacrificing their long-term financial health.”
Mr Whitten said even a small increase in the length of a loan term could add up to big differences in interest over the life of a home loan.
“Since lenders calculate interest daily based on the outstanding balance of a loan, over time that can add up to a significant extra burden in interest,” he said.
According to Australian Bureau of Statistics data, the average loan size in Australia is $625,050.
According to Finder, paying that size loan off over 30 years would cost a typical homeowner $722,602 in interest, based on a competitive variable rate of 5.99 per cent.
Pushing this out to 35 years would add a whopping $147,457 to the total interest over the life of the loan.
For a borrower with a $1 million mortgage, the interest soars from $1,156,066 over the life of a 30-year loan, to $1,391,980 over 35 years.
More than one-third (34 per cent) of Australians say they struggled to pay their home loan in June, up from 26 per cent in June 2022, according to data from Finder’s Consumer Sentiment Tracker.
Mr Whitten encouraged those who extended their loan to look at ways to pay their debts down faster when they can afford to.
“When you’re stretched, you need to lower repayments straight away,” he said.
“But if you find yourself in a position to do so down the track, consider putting extra money into your home loan to make up for the costs that come with extending your loan.”
He said most variable mortgages had a redraw facility, so homeowners could make extra repayments and still get access to those funds in an emergency.
“If your loan has an offset account it’s even better,” Mr Whitten said.
“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.”
