Borrowers advised to weigh short-term savings against long-term costs
Nearly half of Australian homeowners who have refinanced their mortgage have restarted their loan term to 30 years, according to new research.
Results of a survey by finance comparison website Money.com.au showed that 47% of those who refinanced chose to extend their loan period, a move that reduces monthly repayments but increases the total interest paid over the life of the loan.
The findings also revealed that 8% of respondents were unaware their lender had extended their loan term to 30 years until after the refinancing process was complete. This lack of awareness could have significant financial implications for borrowers.
Debbie Hays (pictured above), mortgage expert at Money.com.au, cautioned that while lower monthly repayments may seem appealing, the overall cost can be much higher in the long run. “Yes, it feels like a win because it reduces monthly repayments, but it’s really a false economy,” she said. “You may save a few hundred dollars a month now, but you’re signing up for tens of thousands in extra interest over time and adding back years to your loan when the goal is generally to pay it off sooner.
“Resetting the clock on your home loan back to 30 years in some instances only really benefits the banks, and not the borrower. For many Australians, that means carrying debt into retirement, and that’s a situation that can seriously limit financial freedom later in life.
“If your mortgage is set back to 30 years inadvertently, don’t panic. You can make additional repayments or keep your monthly payments at the higher level you were already managing. That way, you won’t pay any extra interest and you’ll shave years off your loan.”
The survey also indicated that 41% of homeowners who refinanced chose to keep their original loan term, opting not to extend the duration of their debt.
Analysis provided by Money.com.au showed the financial impact of resetting a $600,000 mortgage with 25 years remaining at 5.70% interest. Refinancing to a 5.5% rate and extending the term to 30 years would reduce monthly repayments by $349, but would result in an additional $121,067 in interest over the life of the loan compared to keeping the original term at the lower rate.
Hays acknowledged that there are situations where extending a loan term may be appropriate. “In some cases, extending your loan term can form part of a wealth-creation strategy,” she said. “For example, if you’re upgrading to a new home and turning your current property into an investment, you might extend the loan term and switch the investment loan to interest-only repayments. This can free up cash flow, maintain your investment debt for potential tax benefits and allow you to direct more of your available cash toward the new owner occupied mortgage.
“For families under heavy cost-of-living pressure, resetting your home loan to 30 years to lower monthly repayments can provide essential breathing space in the short term. They can then make extra repayments later when they’re in a stronger financial position.”
Borrowers are advised to ask their broker or lender about repayment amounts under a revised 30-year term and compare these to their current payments before making a decision.
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