Key takeaways
47% of mortgage holders have made changes to their home loan to cope with higher repayments according to Canstar.
Top changes include reducing their extra repayments (35%), 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 include switching to interest only repayments (10%) and more drastic moves such as selling their home (7%) or their investment property (4%).
Fast acting on their finances may be why one in two (50%) of borrowers say they are coping okay right now and 8% are thriving.
This could change once the full effect of the 11 cash rate rises is felt and if the RBA makes another rate rise.
The impact of a further 0.25% cash rate rose in June if passed on by lenders could add $84 to repayments for a $500,000 loan over 30 years. Such an increase would see monthly repayments rise from $2,103 in April 2022 to reach $3,320, a total increase of $1,217.
According to new research from Canstar, almost half of Australian mortgage holders say they have changed their home loan to cope with higher interest rates including stopping their extra repayments, extending their loan term or even selling their home.
Canstar surveyed 669 Australian mortgage holders and found that of the 47% of mortgage holders who have changed their home loan, the top move made was to reduce their extra repayments (35%).
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%).
Steve Mickenbecker, finance expert at Canstar said:
“It's good to see that almost half of Aussie borrowers have planned for increased repayments by making changes to their loans.
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.”
According to 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.
He commented even further:
“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.
Lenders have hardship provisions for borrowers who have exhausted their own resources and may offer an extension to the loan term or 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.”
Fast acting on their finances helps borrowers cope okay
The research also reveals that fast acting on their finances may be why one in two (50%) of borrowers say they are coping okay right now and 8% are thriving.
But this could all change once the full effect of the 11 cash rate rises is felt by households and if the Reserve Bank slogs borrowers with another rate rise.
The impact of a further 0.25% cash rate increase in June if passed on by lenders could add $84 to repayments for a $500,000 loan over 30 years.
This increase would see monthly repayments rise from $2,103 in April 2022 to reach $3,320, a total increase of $1,217 since the rate rise cycle began last year.
| Change in Home Loan Monthly Repayment Due to Cash Rate Increases | |||||
| April-2022 | May-2023 | Total Change Already | +0.25% | Potential Total Change | |
| $500,000 | $2,103 | $3,236 | +$1,133 | $3,320 | +$1,217 |
| $750,000 | $3,154 | $4,855 | +$1,701 | $4,980 | +$1,826 |
| $1,000,000 | $4,205 | $6,473 | +$2,268 | $6,640 | +$2,435 |
| Source: www.canstar.com.au. Monthly repayment calculations based on a loan repaid using P&I repayments over a 30-year loan term. Calculations assume a pre-May cash rate average variable rate of 2.98% (based on owner-occupier variable loans on Canstar's database for a loan amount of
$500,000, 80% LVR and P&I repayments; excluding introductory and FHB-only loans), with increases based on the applicable increase in cash rate. |
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Impact of changes on repayment strategies
1. Reducing or stopping extra repayments
If you make extra repayments of $250 on a $500,000 loan over 30 years, your monthly repayments can be reduced to $3,236.
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However, borrowers are not getting ahead on their loans by stopping or reducing extra repayments on top of the minimum requirement.
Mickenbecker explained:
"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."
| Impact of Making Extra Repayments | |||
| No Extra Repayment | Extra Repayment of $250 | Extra Repayment of $500 | |
| Monthly Repayment | $3,236 | $3,486 | $3,736 |
| Total Interest Cost | $665,085 | $516,930 | $427,522 |
| Repaid in… | 30 Years | 24 Years, 4 Months | 20 Years, 9 Months |
| Source: www.canstar.com.au - 02/06/2023. Scenario calculations assume a loan of $500,000, with 30 years remaining, to be paid off using principal & interest repayments. 6.73% rate based on April 2022 average variable rate (average of owner-occupier variable rates on Canstar's database, available for a $500k, P&I, 80%LVR loan; excluding introductory and other special condition loans) with subsequent cash rate changes applied. | |||
2. Tapping into offset balance
“Offset balances reduce the monthly interest being charged to the loan and shorten the life of the loan. Progressively reducing the amount in offset will return the loan term closer to the original 30 years,” says Mickenbecker.
The report pointed out that if a borrower with a $500,000 loan over 30 years who has $10,000 in their offset account for the life of the loan will likely repay their loan one year and 6 months earlier and save $60,605 in total interest when compared with having no offset balance.
However, if five years into the loan the borrower progressively dips into the $10,000 offset balance to cover rising repayments they will repay the loan only 8 months earlier and save $26,248 in interest compared to if they didn’t have any money in their offset account during this time.
| Impact of Offset Balance on Interest Costs | ||||
|
Offset Balance |
Time to Repay |
Interest Paid Over Life of Loan | Difference to No Offset | |
| Time to Repay | Total Interest Cost | |||
| $0 | 30 Years | $665,085 | - | - |
| $10,000 for first five years, running down $250 per month afterwards | 29 Years, 4 Months | $638,837 | 8 Months | $26,248 |
| $10,000 for entire loan duration | 28 Years, 6 Months | $604,480 | 1 Year, 6 Months | $60,605 |
| Source: www.canstar.com.au - 02/06/2023. Based on the average variable rate (6.73%) of owner occupier variable loans on Canstar's database, available for a loan amount of $500,000, 80% LVR and principal & interest repayments, excluding introductory and first home buyer only loans at Apr-22 with cash rate increases applied. Minimum repayments based on a loan taken out with a term of 30 years. | ||||
3. Refinancing to a lower-rate loan
Refinancing from the average existing borrower variable rate of 6.73% to the lowest variable rate on Canstar’s database of 4.94% can cut monthly repayments on a $500,000 loan over 30 years by $570.
Mickenbecker explained further:
“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."
4. Extending the loan term
Extending the loan term by five years up to 25 years on a $500,000 loan could cut monthly repayments by $348, however, it will increase the interest paid at the end of the loan term by a whopping $123,464.
Mickenbecker further said:
“Extending the term of the loan cuts the monthly repayment, but the trade-off is higher interest paid long term and borrowers repaying loans later in life.
Critically when people find affordability more under control they should increase their payments to the loan to get back to the original trajectory."
5. Switching to interest-only repayments
“Interest-only repayments reduce today’s burden but the risk is that the problem will be kicked down the road to the time when the interest-only period ends and the repayment is not just restored to the former level but goes up to compensate for the period of no loan reduction,” explains Mickebecker.
Switching to interest only for a five-year period on a $500,000 loan over 30 years can cut monthly repayments by $211, however, the combination of a higher interest rate and making up principal loan repayments for the remaining 25 years will increase the total interest costs by over $100,000.
| Impact of Switching to Interest-Only Repayments | |||
| No Interest Only Period | First 5 Years Interest Only | Difference | |
| Loan Amount | $500,000 | - | |
| Interest Rate | 6.73% | 7.26% | - |
| Monthly Repayment | $3,236 | $3,025 for 5 years then $3,617 | - |
| Total Interest Cost | $665,085 | $766,677 | $101,592 |
| Source: www.canstar.com.au - 02/06/2023. Based on average owner occupier variable rate on Canstar’s database available for a loan amount of
$500,000, 80% LVR; excluding introductory and first home buyer only loans at Apr-22 with cash rate increases applied. Calculations based on a loan term of 30 years. Calculations assume loan has an introductory Interest only period of 5 years. |
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