Refinancing your mortgage for a lower interest rate could cost more in the long run if you extend the life of the loan, mortgage experts have warned.
A survey has found nearly half (47 per cent) of all Aussies who refinance their mortgage opt to extend their loan term and this could cost them more than $100,000 in additional interest.
Alarmingly, 8 per cent of surveyed homeowners weren’t even aware their loan term had been extended to 30 years.
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“Yes, it feels like a win because it reduces monthly repayments, but it’s really a false economy,” money.com.au mortgage expert Debbie Hays 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.”
For example, if a $600,000 loan at 5.7 per cent p.a with 25 years left on the loan was refinanced to 5.5 per cent p.a but extended to a 30-year loan term, the repayment would drop by $349 a month but the mortgagee would pay an additional $121,067 more interest than if they had taken the new reduced rate but kept their 25-year loan term.
“Resetting the clock on your home loan back to 30 years in some instances only really benefits the banks, and not the borrower,” Hays said.
But if you’re a family in a cost-of-living pinch, sometimes short-term savings are absolutely necessary.
In this case, Hays said there’s no need to panic.
“Resetting your home loan to 30 years to lower monthly repayments can provide essential breathing space in the short term,” she said.
“They can then make extra repayments later when they’re in a stronger financial position.”
Extending the loan term can also be a worthwhile strategy for investors, making interest-only repayments and retaining debt for tax purposes.
The key is to consider the implications over the entire loan term, not simply the monthly repayment amount, when you refinance.
The survey was conducted by Pureprofile for money.com.au and included a nationally representative sample of 1000 Australians by gender, age, and location.
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