Borrowers explore repayment options

More borrowers are opting for minimum repayments as the interest rate peak nears.

With interest rates on the rise and fixed-rate home loans expiring, mortgage holders are adjusting their repayment strategies.

During the pandemic, many people, with money to spare, began making extra payments on their mortgage debts.

The Reserve Bank of Australia (RBA) has estimated that “the median owner-occupier with a variable-rate mortgage is more than a year ahead on their mortgage payments”.

In addition, NAB said its home loan customers are about 41 months ahead of schedule – largely as a result of people paying down more over the last two years when interest rates were at record-low levels.

But, as interest rates have lifted to 4.1 per cent, alongside fixed-rate loans about to expire, paying additional mortgage repayments might not be so enticing for borrowers.

Around one-third of the outstanding housing credit are for fixed-rate loans and around half of that, estimated to be around $350 billion over 800,000 loans, have already started to roll off between June and September 2023, increasing mortgage payments at a time when the cost of living has increased.

As such, some borrowers, particularly those with multiple properties are opting for interest-only loans to reduce cash flow pressure and focus on drawing down non-deductible debts, Mortgage Choice broker on the NSW South Coast, Jen Hughes, said.

“I’m doing a refinance now to a tier three lender ... And it’s going to bring about $900 extra in their pocket to pay down their other debts,” the Merimbula-based broker said.

She added that while the client wasn’t under financial stress, the refinance strategy comes as the property “bottomed out” and they needed to wait for property prices to increase yet again.

While such loans are more common within the investment space, owner-occupiers are also exploring this option.

Ms Hughes said another client was moving onto interest-only, but the lenders are a little more hesitant and responsible lending laws can kick in.

She also warned interest-only loans may result in higher payments over the long term, as the principal is not reduced during the interest-only period.

In 2020, ASIC provided confirmation to lenders that a change from principal and interest to interest-only repayments can be made if a consumer requests to reduce their repayments in the short term.

The corporate watchdog advised that these variations no longer trigger responsible lending obligations and contract variations can be agreed between the lender and the borrower, when applied through variations to the existing contract.

While it remains an onerous process, brokers are exploring all options available, including minimum repayments.

“Anyone who is not looking to retire within 10 years are looking at the minimum repayments,” she said, unless they have excess income.

Another emerging trend is borrowers becoming more mindful of their spending habits, Mortgage Choice broker Dan Liao said.

It coincided with the Commonwealth Bank’s June data for household spending revealing a decline of 1.7 per cent for the month.

The Brisbane-based broker reported a notable increase in clients seeking advice on reducing interest charges on their mortgages over the last three months.

“From taking advantage of multiple mortgage offsets, or even just understanding the difference in frequency of repayment can make long term,” he said.

However, he added that “the large wave of interest-only requests have not started yet.”

He suggests decreasing leverage against income by ceasing facilities like Afterpay, Zip Pay, Humm, personal loans, and car loans.