The pros and cons of restructuring your mortgage

For lots of people, their home loan is one of their longest-standing financial commitments.

When we take out a mortgage, we often sign up to pay it off over 25 or even 30 years.

But a lot can happen over three decades, and sometimes it makes sense to restructure the loan.

There can be sound reasons to do so – but also pitfalls to watch out for.

Here are some things to think about if you’re considering a restructure.

Affordability

Your home loan payments may be among your biggest monthly bills, so it makes sense that when times are tough, or your budget is under pressure, they catch your eye.

Sometimes, particularly if you have had the loan for a while, it can be possible to restructure it to make it more affordable. That might mean extending the loan term to reduce the monthly or fortnightly payments or switching to interest-only payments for a while.

But take care – extending the loan term means that you pay interest for longer, which can be an expensive option. A $600,000 mortgage on an 8.4% interest rate will cost $1,437,375 over 25 years, or $1,646,119 over 30, according to Sorted’s mortgage calculator.

If you opt for an interest-only payment, it means that your loan balance does not reduce as it otherwise would. At the end of the
interest-only period, you may find you have to make higher repayments to pay off your loan within its term, or you need to extend the term.

Sorted calculates that a $500,000 loan with a one-year interest-only period would cost a total of $1,378,329 to repay, compared to $1,371,766 without the interest-only period, on an 8.4% interest rate over 30 years.

Debt

If you have other debt that you would like to get on top of, increasing your mortgage to pay it off can be an option.

The interest rates charged on a mortgage are usually significantly less than that for a personal loan or credit card.

But watch out – if it takes you 20 years to pay off a debt that would have otherwise taken five, the lower interest rate is unlikely to make up for the overall higher total interest cost of carrying the debt so much longer. It can be useful to set the debt up as a separate loan so that you can be sure that you clear it within a reasonable timeframe.

Accessing equity

If you have owned a home for a while, you may have built up equity in the property, through a combination of paying down your home loan and values increasing.

Sometimes, you can tap into this equity by restructuring your loan – maybe to buy an investment property, to do some work on your home or for another purpose.

It is important to check, though, that you know what the cost of this extra borrowing will be. Extra equity might make the lender more likely to lend to you, but it does not reduce the amount you have to repay if you borrow against it.