The rising cost of living is pushing more homeowners to the brink, with around one in 10 Australians forced to downsize their home last year to reduce living expenses, new research has revealed.
The Citi Fin-Q survey, commissioned by Citibank, also found that around two-thirds of Australians believe homeownership is out of reach for their children, while the majority of respondents said more government support is needed to help first home buyers into the market.
But there are ways to improve your mortgage situation without impacting quality of life.
Borrowers which find themselves in a fiscal cul-de-sac have a number of financial hardship options to explore, all of which will help to keep you in your existing home.
Save tens of thousands
- First, extending the term of your home loan from, say 25 years to 30 years, may provide temporary reprieve.
- Second, reverting to interest-only repayments for a while may help to reduce mortgage stress.
However, neither option will help you to get ahead long-term; in fact, both options may mean paying tens of thousands of dollars extra in interest over the life of a loan.
A more financially-viable solution for homeowners may be to refinance into a lower, variable rate home loan option. Here comes the maths: if you’re currently paying 7.39 percent interest (the average of the major four banks’ standard variable interest rate) on a $400,000 home loan over 25 years, then your monthly repayments will be around $2927 and you’ll pay over $478,000 in interest over the life of the 25-year loan.
By switching to one of the best available variable rates on the market, at 6.29 percent by Loans.com.au, you’ll cut your monthly repayments by $278 and even after paying switching costs, of around $1000, you’d still be about $82,000 better off after 25 years.
Let’s take a more conservative example; you’re paying the average of the big four’s basic variable rate; at 6.69 percent. You could still reduce your monthly repayment by $100 and save almost $30,000 over 25 years by cutting your rate by 40 basis points.
Some lenders with market-leading interest rates may come with restrictions such as 20 percent equity, so make sure you check the fine print when comparing home loans.
What to do with the extra cash
Homebuyers doing it tough will likely want to put the extra ($100 or $278) savings found from refinancing straight towards household bills and other living expenses. However, there are significant saving benefits for those who can maintain higher repayments. Saving just half of a $278 repayment reprieve, $139 per month, on a $400,000 mortgage paid at 6.29 percent could save a homeowner more than $50,000 in interest and shave two years and nine months off a 25-year loan term.
So before you put the house on the market, consider using a mortgage calculator to determine the savings you could find by refinancing.