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Drastic changes Aussie borrowers are making to cope with rising rates

Aussies are reeling in their repayments, tapping into their extra funds and refinancing to cope with higher rates.

Australian property and open home sign. Property and rising interest rate concept.
Aussies homeowners are feeling the pressure from higher interest rates. (Source: Getty)

Aussies are dealing with the aftershocks of multiple interest rate hikes, and many have been forced to switch up their home loan habits to keep up.

Almost half of Aussie mortgage holders have made changes to their home loan to cope with higher repayments, according to new research from Canstar.

The top mortgage moves included reducing (35 per cent) or stopping (29 per cent) their extra repayments, tapping into their redraw or offset funds (26 per cent) and refinancing to a lower rate (22 per cent).

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Other moves included extending their loan term (12 per cent), switching to interest-only repayments (10 per cent) and more drastic moves like selling their homes (7 per cent), the survey of 669 mortgage holders found.

If you’re thinking of making changes to your home loan, here’s a look at how the top three moves could impact you.

1. Reducing or stopping extra repayments

A borrower who culled extra repayments of $250 on a $500,000 loan over 30 years could cut their monthly repayments to $3,236. But it means they won’t be able to get ahead on their loan.

“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,” Canstar finance expert Steve Mickenbecker said.

“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.”

In this scenario, a borrower who is able to keep up with their extra repayments would shave five years and eight months off their loan term and save $148,155 in total interest.

2. Tapping into offset balance

Offset balances reduce the monthly interest being charged to the loan and shorten the life of the loan,” Mickenbecker explained.

“Progressively reducing the amount in offset will return the loan term closer to the original 30 years.”

For instance, the same borrower with $10,000 in their offset account for the life of the loan would be able to repay it one year and six months quicker and save $60,605 in total interest, compared to someone with no offset balance.

3. Refinancing to a lower rate

Refinancing to a lower rate is the “least painful” way to cope with higher interest rates, Mickenbecker said.

The same borrowers could save $570 a month by switching from the average variable rate of 6.73 per cent to the lowest rate on Canstar’s database of 4.94 per cent. This would also save them $205,396 in total interest.

“Switching from the average variable rate into one of the lowest-rate loans available is the biggest saving borrowers can make,” Mickenbecker said.

“A low-rate loan can dramatically reduce the monthly repayment, helping mortgage holders to cope with rate increases without drastic changes to their lifestyle.”

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