- Rising interest rates push 50% of borrowers to adjust mortgages
- Refinancing to a lower rate can ease repayment burdens
- Borrowers must weigh short-term relief against long-term loan costs
On the back of the Reserve Bank of Australia (RBA) hiking the official cash rate, it’s been revealed that 50% of borrowers have already made drastic changes to their mortgages to help cope with the higher borrowing costs.
A recent survey from Canstar found that borrowers have been forced to stop extra repayments, extend their loan term and even sell their homes as the higher interest rates environment has started to weigh on households.
The survey found that 35% of borrowers elected to reduce their extra repayments, this was closely followed by stopping their extra repayments (29%), tapping into redraw or offset funds to help with repayments (26%), refinancing to a lower rate loan (22%) and extending their loan term (12%).
Other changes included switching to interest-only repayments (10%) and more drastic moves such as selling their home (7%) or their investment property (4%).
Canstar’s finance expert, Steve Mickenbecker said it was good to see that almost half of all borrowers have planned for increased repayments by making changes to their loan.
“Many borrowers have used the low-interest era in recent years to prepare for higher rates by making extra repayments and now have money in their offset accounts or available for redraw,” said Mickenbecker.
“Refinancing into a lower rate loan has got to be the least painful way to cope with higher interest rates.”
“Borrowers can potentially save around half of the repayment increases that have come through in the last 12 months, halving the degree of difficulty.”
No time to get ahead
Mickenbecker said that borrowers who took out a loan in the lead up to the first Reserve Bank cash rate increase in May last year haven’t had time to build their defences for higher interest rates.
“Buyers at this time purchased when property prices were high and with their large loans, many will already be in mortgage stress and find the option to refinance is no longer open to them.”
“This group may have to be tougher with themselves to find savings in their household budget or to supplement their income in some way in order to cover higher repayments.”
He said lenders have hardship provisions for borrowers who have exhausted their own resources and may offer an extension to the loan term or to briefly switch the loan to interest only to provide lower repayments.
“Borrowers have to act before the loan becomes too big a problem to bear and they are forced to sell.”
Steve Mickenbecker, Canstar’s finance expert
Weigh up the costs
Mickenbecker said while some of the steps taken to reduce mortgage repayments, like cuttings extra repayments, might be helpful in the short term, it’s also important to weigh up what that will mean longer term.
“With higher repayments now absorbing what were extra repayments, borrowers are no longer building their buffer for the future, but the present pain is being relieved.”
“However, borrowers who want to save on interest and pay off their loan months or even years earlier should look to top up their repayments again once they’re financially fit to do so.”
He said that tapping into your offset account and extending the loan’s term will eventually also mean that you’re paying back more interest over the life of your loan.
While moving to interest only will mean that you’re not making a dent in your principal.
According to Mickenbecker, refinancing to a lower rate is still the best option for most mortgage holders.
“Switching from the average variable rate into one of the lowest rate loans available is the biggest saving borrowers can make.”
“A low rate loan can dramatically reduce the monthly repayment, helping mortgage holders to cope with rate increases without drastic changes to their lifestyle.”
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