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Home loan panic: What scared owners are doing to keep the cost of living down


Borrowers are cutting loan repayments to pay more interest later. But future costs don't matter so much when you're struggling right now.

More and more Australian borrowers have been pushed to extreme measures as the cost of living crisis continues and interest rates remain stubbornly high.

New Finder data shows that up to 1 in 8 borrowers say they've extended their loan terms in a bid to keep their monthly repayments down.

1 in 5 have switched to interest-only repayments in the last 5 years.

Both options are a definite way to cut down your monthly loan repayments. And both come with a long term cost.

Hold on, how does making your home loan longer help?

Most Australians get 30-year home loans. If you pay the loan off faster you pay less interest, get out of debt faster and build wealth quicker.

But your lender might let you do the opposite and give you a few more years. By extending the loan term your monthly repayments shrink. Sweet relief.

But every year you add to your home loan adds tens of thousands of dollars to your total costs. When it comes to big debts, time really is money.

You can try this yourself with a loan repayment calculator.

Let's say you borrow $600,000 over 28 years with a 6.50% interest rate.

  • Your monthly repayments = $3,883
  • Your total interest charges over 25 years = $704,385

Now what if you set the loan term to 30 years instead.

  • Your monthly repayments = $3,793
  • Your total interest charges over 30 years = $765,267

In the 28-year example your repayments are $90 higher each month. But you pay less interest overall.

Moving to 30 years costs you $60,000 more in interest.

Is interest-only a safer option?

With interest-only repayments you don't make any progress on your loan principal (the money you've borrowed).

But your lender still charges interest.

Once again, your repayments are lower for a while. But to make up the difference your lender charges you more later.

The danger is if you switch to interest-only repayments for a period but your financial situation doesn't improve. Then you go back to making principal-and-interest repayments that are higher than they were before.

The good news? Please tell me there's good news

The good news is that both these options can help if you're struggling to afford your home loan repayments.

Longer term costs matter far less when you're worried about repaying your loan right now. But you need to know exactly what the risks are before you do it.

And the good news is no home loan is forever. You can still get out of debt faster by making extra repayments later if you're in a better financial position.

If your loan has an offset account you can build up savings there and it has a similar interest and time-saving effect.

Struggling with rising living costs? Check out some expert money saving tips.

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