Mortgage ‘tax’ that cost Aussie dad $68,000: ‘Never part of the plan’

An Aussie dad has revealed the “costly trap” that added tens of thousands to his mortgage. Skyrocketing interest rates are prompting many borrowers to refinance to a lower rate, but there is one common detail that can erase the potential savings.

Brisbane homeowner Sean Callery recently refinanced his home loan and said he was surprised to discover it had reverted back to a 30-year loan term. The dad-of-two told Yahoo Finance he and his wife had already been paying off their mortgage for three years and were keen to get it paid off as soon as possible.

“Going back to square one, so we’d nearly be at retirement age by the time we paid it off, was never part of the plan,” he said.

RELATED

• CBA, ANZ, NAB make major move amid RBA interest rate cut speculation: 'Locked in'

• Centrelink recipients warned over ‘bonus’ cost-of-living payment

• Gen Z trend sparks fear among Aussie pub owners: 'Worst in 40 years'

Callery said the longer loan meant lower, regular repayments but came with a major catch, an added $68,000 in extra interest.

“Our mortgage has become much more of a burden because of high interest rates and we’ve just had a baby. We really could be doing with the extra cash” he said.

Repayments have skyrocketed by $1,562 per month on the average $600,000 loan since the Reserve Bank of Australia (RBA) started hiking rates in May 2022.

Many borrowers are eagerly waiting for an interest rate cut, but governor Michelle Bullock has warned it isn’t likely to happen this year.

Refinancing to a lower rate can be a way for borrowers to take matters into their own hands. A total of $15.79 billion worth of mortgages were refinanced in June, a drop of $301 million from the previous month.

Extending mortgage a ‘costly trap’

Finance Brokers Association of Australia managing director Peter White said extending your home loan back to 30 years within the first five years of having your mortgage could add a “tax” to overall interest costs.

“You’re essentially adding another five years of paying mostly interest,” White said.

Money.com.au analysis found a borrower refinancing a 25-year $600,000 home loan from the average 6.37 per cent interest rate to the average new rate of 6.28 per cent would slash their monthly repayments by $297.

But if they reset their loan to a 30-year mortgage, they would end up paying an extra $133,374 more in interest in total.

Money.com.au home loans expert Mansour Soltani said it was common practice for banks to default some refinancers back to a 30-year mortgage term.

“While extending your loan term would reduce your monthly repayments and might seem like a great deal, it’s a costly trap that will leave you footing the bill for thousands in extra interest,” he told Yahoo Finance.

How can borrowers get ‘back on track’?

Some banks are extending loan terms in order for borrowers to meet stricter serviceability requirements.

“If you can still manage the repayments and pass the serviceability check, you can request with your lender or mortgage broker to maintain your existing loan term,” Soltani said.

“If you don’t pass servicing for a loan term shorter than 30 years, you can refinance to a 30-year term but continue making the same repayments as before. This will make sure that you don't add extra years onto your loan.

Callery said he contacted his bank and was told the 30-year term was standard for home loans, even for refinancers.

“We ended up needing to increase our regular repayments to get us back on track. I’m glad I queried it and I’m amazed it’s not something that was specifically raised with us when we refinanced,” he said.

Get the latest Yahoo Finance news - follow us on Facebook, LinkedIn and Instagram.