Mortgage stress drives Australians to extend loan terms, potentially increasing long-term costs

New research from Finder, Australia’s most visited comparison site, reveals that a significant number of Australian mortgage holders are extending their loan terms to cope with rising interest rates and increased repayments.

Key findings:

13% of mortgage holders (approximately 429,000 borrowers) have extended their loan term in the last 12 months to lower repayments.
7% (231,000 borrowers) have extended their loan term by less than five years.
6% have added five years or more to their mortgage.
The average Australian household is now paying over $21,000 more annually for their mortgage compared to April 2022.
34% of Australians reported struggling to pay their home loan in June 2024, up from 26% in June 2022.

Richard Whitten, home loans expert at Finder, warned that while extending loan terms can provide short-term relief, it could lead to significant long-term costs:

“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,” Whitten said.

To illustrate the potential impact, Finder provided an example:

For an average loan size of $625,050 over 30 years at a 5.99% variable rate, the total interest paid would be $722,602.
Extending this to 35 years would add an extra $147,457 in interest over the life of the loan.
For a $1 million mortgage, the difference in interest paid between a 30-year and 35-year term is $235,914.

Whitten advised borrowers who have extended their loans to look for ways to pay down their debts faster when possible:

“When you’re stretched, you need to lower repayments straight away. 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 also suggested utilizing features like redraw facilities or offset accounts to manage extra repayments while maintaining access to funds in emergencies.

The research highlights the ongoing challenges faced by Australian homeowners in the current economic climate, with rising interest rates putting significant pressure on household budgets.