If the November rate hike is putting a strain on your finances, considering an extension of your loan term could be a viable solution. This approach may alleviate the immediate financial burden by reducing monthly repayments. However, it’s essential to be mindful of the potential drawbacks that come with extending the mortgage term. Here’s a closer look at what factors to consider.
Is the recent 0.25% cash rate increase by the RBA putting a financial squeeze on you, not to mention the previous 12 rate hikes? Promptly responding to the Reserve Bank of Australia’s Melbourne Cup Day rate rise, most lenders swiftly raised their variable home loan rates. This 13th rate hike since May 2022 has resulted in an uptick in the average variable rate to 6.62%.
What does that translate to in actual dollars and cents?
For a $500,000 variable rate home loan with a 25-year term, the recent 0.25% rate hike could result in a monthly repayment increase of $78. For homeowners already operating on a tight budget, finding those additional dollars can pose a challenge.
One potential approach to alleviate repayment pressure is to consider extending the loan term.
Reducing Repayments: The Impact of Extending Your Loan Term
If you currently hold a 25-year loan, your lender might offer the flexibility to extend it for up to an additional five years, potentially extending the term to 30 years. If approved, this reset can lead to a substantial reduction in your monthly repayments.
Using the example of the $500,000 mortgage mentioned earlier, transitioning from a 25-year loan to a 30-year loan could result in a monthly repayment decrease of approximately $214, even after factoring in the effects of the November rate hike.
Unveiling the Hidden Costs of Extending Your Loan Term
There’s an appealing aspect to the idea of trimming a couple of hundred bucks off your monthly loan repayments, particularly as the festive season approaches. However, extending your loan term comes with a concealed expense.
Prolonging the time it takes to pay off your loan means extending the duration of interest payments. Even though your monthly repayments may decrease, the overall long-term interest cost can be significant.
For instance, extending a $500,000 loan from 25 to 30 years could result in paying an additional $128,000 in total interest.
It’s crucial to note, though, that these extra interest payments aren’t set in stone. Closing the gap and minimizing interest costs may be achievable through other means like making future extra repayments when your budget allows for it, utilizing an offset account, or paying off the loan sooner (such as in the case of receiving a lump sum inheritance or funds from a redundancy package from your employer ).
In essence, extending your loan term can offer temporary relief, but you’ll need to carefully evaluate the costs against the benefits. Additionally, consider whether you anticipate being in a stronger financial position in the future to expedite loan repayment and thereby reduce interest payments.
How we can help?
In addition to considering an extension of your loan term, we can also assist you in exploring alternative solutions to alleviate the impact of higher rates. Potential options available with your lender encompass:
- Temporarily reducing your loan repayments.
- Postponing repayments for a designated period.
- Transitioning to interest-only payments for a specific duration.
Another alternative we can assist you with is refinancing your home loan to a better rate. Just reach out to find out more.
The key is to act proactively; the sooner you reach out for assistance, the quicker we can potentially provide financial relief. So call today on 1800-E-LOANS to explore solutions.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.