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The long-term impact of interest rate rises has delivered almost half of mortgage holders a hip picket hit reaching well into the tens of thousands of dollars, according to new research.
When we think about the impact of rate hikes, it's generally a fairly straightforward, short-term equation – higher rates mean higher mortgage repayments, which in turn means less spare cash for households to spend.
However, the string of 12 increases since May last year – which is tipped to rise to 13 later today when the RBA board gathers for its November meeting – is also preventing Australians from making extra repayments and getting ahead of their loan, according to Canstar.
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On average, homeowners contribute an extra $266 per month to their mortgage repayments, paying the loan off sooner and therefore saving them tens of thousands of dollars in avoided interest in the long run.
"Making extra loan repayments not only reduces the long-term cost of the loan but also cuts the period of time that borrowers are indebted to the bank and making repayments," Canstar finance expert Steve Mickenbecker said.
But the finance comparison service says 45 per cent of mortgage holders have lost the ability to invest in the strategy due to the cost of living crunch.
It says someone with 15 years and $200,000 left on their mortgage will miss out on $26,288 in interest savings, as they'll take three fewer years to pay the loan off.
For a newer borrower with $400,000 owing over 25 more years, the damage is far worse: $94,426 in missed savings and being locked into the loan for four years and nine months longer than what would otherwise have been the case.
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Or, for a new 30-year loan for $500,000, the difference between making extra repayments and not is more than $150,000.
"Unfortunately, right now borrowers are abandoning the strategy in their droves," Mickenbecker said.
"Many borrowers who had their heart set on repaying their loan earlier have had to ditch the idea to simply meet higher interest rates and the cost of living pressures.
"Making extra repayments to the home loan is a way to be financially free sooner.
"When the mortgage is repaid the homeowner can move on to their next big financial goal and continue to grow their wealth.
"Borrowers who have had to forgo making extra repayments will potentially be inhibited from launching into a full-on investment strategy by another three to six years of shelling out loan repayments."
The 38 per cent of mortgage holders who, according to Canstar, are making extra repayments at the moment could dwindle to an even smaller share of the market, with experts expecting the RBA to hike the cash rate a further 0.25 per cent today.
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That would push minimum repayments up once again, making it even more difficult to pay off a loan early.
Mickenbecker said it's hard to prioritise extra repayments while struggling with the cost of living, but that it's a worthwhile strategy when circumstances allow.
"When the Reserve Bank started to hike the cash rate 18 months ago, the banks reported that a high proportion of borrowers would cope comfortably because they had built up balances in offset accounts or available for redraw," he said.
"Fewer borrowers are doing that today and will as a result be indebted for longer and be less resilient to future shocks.
"It's hard to preach the message of higher repayments when borrowers are doing it tough, but times will get better and when they do, borrowers can and should go into repair mode by restoring their extra loan repayments."
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