“Never part of the plan”
An Australian dad has revealed the ‘cost trap’ that added tens of thousands to his mortgage. Skyrocketing interest rates are prompting many borrowers to remortgage at a lower rate, but there’s one common detail that can wipe out the potential savings.
Brisbane homeowner Sean Callery recently refinanced his home loan and said he was surprised to find that the term had been reset to 30 years. The father of two told Yahoo Finance He and his wife had been paying off their mortgage for three years and wanted to pay it off as quickly as possible.
“It was never part of our plan to start over, so we would have been almost retired by the time we paid off the debt,” he said.
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Callery said that while the longer loan term means lower, more regular repayments, it comes with a big catch: $68,000 in additional interest.
“Our mortgage has become a much bigger burden due to high interest rates and we just had a baby. The extra money could really do us good,” he said.
Since the Reserve Bank of Australia (RBA) began raising interest rates in May 2022, repayments on an average $600,000 loan have jumped by $1,562 per month.
Many borrowers are eagerly awaiting a rate cut, but Governor Michelle Bullock warned that it is unlikely to happen this year.
Refinancing at a lower interest rate can be a way for borrowers to take matters into their own hands. Mortgages totaling $15.79 billion were refinanced in June, a decrease of $301 million from the previous month.
Mortgage extension a “costly trap”
Peter White, chief executive of the Finance Brokers Association of Australia, said extending your home loan to 30 years could result in a “tax” on the total interest cost within the first five years of your mortgage.
“Basically, you’re paying mostly interest for another five years,” White said.
According to analysis by Money.com.au, a borrower’s monthly repayment would be reduced by $297 if they refinanced a $600,000, 25-year home loan from the average interest rate of 6.37 percent to the new average interest rate of 6.28 percent.
However, if they were to convert their loan into a 30-year mortgage, they would have to pay a total of $133,374 more in interest.
Mansour Soltani, mortgage expert at Money.com.au, said it was common practice for banks to reduce the term of some refinancings to 30 years.
“While extending the loan term would reduce your monthly repayments and may seem like a good deal, it is a costly trap that will leave you with thousands in extra interest,” he said. Yahoo Finance.
How can borrowers get back on track?
Some banks extend loan terms to allow borrowers to meet stricter solvency requirements.
“If you can still make the repayments and pass the credit check, you can ask your lender or mortgage broker to maintain your existing loan term,” Soltani said.
“If you do not meet the service conditions for a loan term of less than 30 years, you can refinance to a 30-year term but continue to make the same repayments as before. This will ensure that no additional years are added to your loan.
Callery said he contacted his bank and was told that a 30-year term is standard for home equity loans, even for refinancing.
“We ultimately had to increase our regular repayments to get back on track. I’m glad I asked about this and I’m amazed this issue wasn’t specifically addressed in the debt restructuring,” he said.
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