Extending Your Mortgage Term: What You Need To Know

If you're struggling to meet your monthly mortgage payments, you may be considering extending your mortgage term. This can be a good option if you're facing cash flow difficulties and need to lower your monthly outgoings. However, it's important to remember that extending your mortgage term will result in you paying more interest over the life of the loan. In this paragraph, we'll explore the pros and cons of extending your mortgage term and discuss some alternative options to consider.

Weighing the financial pros and cons

Extending your mortgage term can be a good strategy for managing monthly repayments. However, there are financial pros and cons to consider before making this decision.

Financial Pros

• Reduced monthly payments: By extending your mortgage term, you can reduce your monthly payments, which can ease financial pressure and improve your short-term financial security. This can be especially helpful if you are facing reduced income, increased living costs, or unexpected expenses.
• Improved cash flow: Lower monthly payments can improve your cash flow, allowing you to allocate funds to other essential expenses or savings.
• Greater flexibility: Some lenders may allow you to overpay your mortgage up to a certain level without incurring additional charges, giving you the flexibility to overpay when your finances are secure and cut back when you face other bills.
• Ability to purchase a larger home: With lower monthly payments, you may be able to afford a larger home or increase your disposable income.
• Debt management: If you are juggling multiple debts, extending your mortgage term can give you more time to pay off high-interest loans or credit cards, as the interest on your mortgage is likely to be lower.

Financial Cons

• Increased total interest: The most significant financial con of extending your mortgage term is that you will pay more interest over the life of the loan. This can amount to thousands of dollars, depending on the length of the extension.
• Longer financial commitment: Extending your mortgage term means you will be in debt for longer, which can impact your long-term financial planning and delay milestones such as retirement or significant investments.
• Psychological impact: Being in debt for a longer period can have a psychological impact, as you may feel burdened by the extended financial commitment.
• Potential negative equity: With lower monthly payments, your equity in the property will build up more slowly, which could be an issue if property prices decrease or if you plan to move soon.
• Credit score impact: Extending your mortgage term may require a credit check, and a poor credit score may impact your ability to extend.
• Legal costs: In some cases, extending your mortgage term may require amending your mortgage deed, which could incur legal costs.

Seeking advice from a broker or advisor

Independent mortgage brokers can offer valuable advice and help you choose a mortgage from a pool of lenders, tailoring their guidance to your needs and circumstances. They can search the entire market for the best deals and increase your chances of approval. This can save you time, stress, and money in the long run.

Mortgage advisors or brokers are qualified professionals who can help you find the most suitable deal for your circumstances. They can also assist with complex cases, such as self-employment or irregular income, and can guide you through the process of remortgaging or buying additional properties.

Some brokers are 'tied' or 'multi-tied', meaning they work with specific providers or a panel of lenders, while independent brokers can source mortgages from the whole market. It is recommended to use a broker who is 'whole-of-market' to ensure they can search every mortgage option.

Online platforms like Tembo and Unbiased can match you with a qualified broker who provides award-winning service and guarantees the best deal. These platforms often offer discounts, and you can compare monthly repayment amounts and total interest paid with different mortgage terms.

Remember, while advice can be helpful, ultimately, the decision to extend your mortgage term depends on your specific circumstances and financial goals.

Understanding the impact on interest rates

Extending your mortgage term can have a significant impact on interest rates, and it's important to understand the potential consequences before making any decisions. Here are some key points to consider:

Interest Rate Changes: When you extend your mortgage term, your lender may adjust the interest rate, which can impact your overall cost and monthly payments. Some lenders may offer a lower interest rate initially, but it's important to remember that rates can fluctuate over time. It is worth noting that some lenders may have limitations on extending the term, so exploring available options is essential.

Increased Interest Payments: Extending your mortgage term often results in paying more interest over the life of the loan. This is because interest accrues over a more extended period. While lower monthly repayments can provide financial relief, the total cost of the loan increases. Therefore, it is crucial to consider both the short-term benefits and long-term costs before proceeding with a mortgage extension.

Impact of Interest Rate Type: The type of interest rate you have, whether fixed or variable, also plays a role in the overall cost. A fixed-rate mortgage maintains the same interest rate throughout the term, providing stability and predictability. On the other hand, a variable-rate mortgage can change during the term, which means your interest costs may fluctuate, potentially increasing or decreasing your monthly payments.

Financial Flexibility: Extending your mortgage term can offer financial flexibility by reducing monthly repayments. This can be particularly helpful during periods of financial hardship or when facing changes in income. However, it is essential to regularly assess your financial stability and make extra payments when possible to minimise the impact of increased interest payments over time.

Long-term Financial Goals: While extending your mortgage term can provide short-term relief, it may delay your long-term financial goals, such as achieving financial freedom or planning for retirement. It is crucial to weigh the immediate benefits against your future financial aspirations.

Before making any decisions, it is always recommended to seek professional advice and carefully evaluate the terms and conditions of the extension, including interest rate changes, monthly payments, and any associated fees or penalties.

Considering alternatives, e.g. refinancing

If you're considering refinancing your mortgage, there are several options to explore. Firstly, it's important to note that refinancing involves replacing your current home loan with a new one. This can be done for various reasons, such as reducing your interest rate, lowering monthly payments, or tapping into your home's equity. When refinancing, you can choose a new mortgage with a shorter or longer term. For example, you could refinance a 30-year mortgage into a 15-year loan, which would increase your monthly payments but reduce the total interest paid over the loan's life.

Before refinancing, it's crucial to consider the costs involved, as there may be closing costs and other fees associated with the process. Additionally, refinancing may not be the best option if you plan to stay in your current home for only a few more years, as it may not result in any savings. In this case, you could consider alternative strategies such as prepaying your mortgage, which involves sending higher monthly payments to your lender to reduce the amount owed faster. This gives you better control of your loan but may not provide access to lower interest rates.

Another alternative is a "refinance-to-prepay" strategy, where you refinance to a lower interest rate and then make extra payments on the new loan. This approach combines the benefits of refinancing and prepaying, allowing you to access lower interest rates while also accelerating the repayment process. However, it's important to note that refinancing to a lower interest rate and extending the term could result in paying more interest in the long run.

If you have an FHA loan, you may want to consider an FHA Streamline refinance, which can help you extend your term without an appraisal. On the other hand, a conventional refinance is suitable for those without a government-backed loan, allowing them to lower their rate, change their term, or convert equity into cash. Additionally, if you're facing financial hardship, there are options like repayment plans or payment deferral that can help you manage your mortgage payments without refinancing.

Ultimately, the decision to refinance or explore alternatives depends on your financial situation, goals, and preferences. Speaking with a mortgage advisor can be valuable, as they can provide personalized advice and help you explore the most suitable options.

Evaluating personal circumstances and eligibility

When considering extending your mortgage term, it's essential to carefully evaluate your personal circumstances and eligibility. Here are some key factors to consider:

Financial Situation: Assess your current financial situation and determine if you are experiencing difficulties in making your mortgage repayments. Are you facing challenges in meeting your monthly payments due to rising costs or other financial obligations? If money is tight, extending the mortgage term can provide some financial relief by reducing the amount you pay back each month.

Other Debts: Consider whether you have other high-interest debts or loans that you are currently paying off. Extending your mortgage term can free up cash flow, allowing you to allocate more money towards these high-interest debts.

Age and Repayment Period: Your age and the remaining repayment period of your mortgage are crucial factors. Lenders typically have age limits, and you need to ensure that the extended term won't exceed the oldest borrower's specified age, usually the 75th birthday. Additionally, keep in mind that extending the term will result in paying more interest over the life of the loan.

Future Financial Prospects: Reflect on your future financial prospects and whether you anticipate any significant changes in your economic situation. If you expect your financial position to improve in the future, extending your mortgage term can be a temporary solution, and you may be able to reduce the term again later.

Seek Professional Advice: Consult an independent mortgage broker or advisor who can provide personalised guidance based on your circumstances. They can help you understand the implications of extending your mortgage term and explore alternative options, such as switching to a fixed-rate mortgage or making overpayments if allowed by your contract.

It's important to remember that while extending your mortgage term can provide short-term relief, it may result in paying more interest in the long run. Carefully weigh the benefits against the potential costs and consider seeking professional advice to make an informed decision.

Frequently asked questions