Will Australia become a Capital Exporter?; Mortgage holders have more cash than official figures recognise - money held in offset & redraw not accounted for by ABS
Tweet Topic Started: 6 Sep 2013, 08:49 AM (9,742 Views)
No it will become a en mass people exporter as people with useless degrees graduate and realize that they aint getting no good jobs and will never be able to afford a shack in the ass end of Kenmore or another ghetto suburb and they will just leave, marry overseas, and buy elsewhere. Then we will make it up by importing people from countries who want to live here.
And that's what the future of Australia is going to look like friends.
To an earlier point - yes a bank would let you take a repayment holiday if you are ahead in repayments, and even if they didn't you could just redraw the extra repayment and put it into the account where payments were made from. A buffer is a buffer. Almost every borrower that I talk to who is looking to refinance or access equity has a reasonable buffer. In may cases quite substantial buffers.
Good, that's all I wanted to know. That may help reduce the overall severity of a recession should we experience one any time soon.
But something unusual appears to have occurred here - as far as I'm aware, falling interest rates have always put more disposable income into the hands of those on variable rate mortgages. That's always the way it has worked for me. I've seen no evidence that millions of people have approached their bank en masse and requested that the additional money be used as extra payments on the loan, sensible though that may be. The extra spending power given by falling rates is what has made monetary policy so much more effective and quick-acting in Australia than in say, the US where most mortgages are fixed rate - the fed immediately slashed interest rates to the bone in response to the GFC but the impact was slow and muted because it only made new borrowing cheaper.
Have the major banks quietly taken unilateral action that given the scale, has the positive effect of more rapidly paying down mortgage debt while simultaneously having the general negative effect of pulling what probably equates to billions of dollars worth of general consumption spending each month out of the economy?
Has the effectiveness of monetary policy as a counter-stabalisation tool been compromised? After almost 200bp worth of cuts, the economy doesn't seem to be responding the way it has done in the past. Overall it's pretty muted - which is remarkable considering that this level of rate cuts in the past would probably have almost set the economy on fire by now.
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Given that most people realise that in an increase in disposable seems to disappear without trace and if they need the money later most have a redraw facility, I would find it amazing if most people didn't at least delay taking the extra cash or at least only take part of it as interest rates went down.
Only a fool would spend the cash just because it was there.
Generally agree miw but I would be cautious with that statement - the vast majority of people live a bit closer to the bone than you do on what I assume is a fairly high income.
I've seen no evidence that millions of people have approached their bank en masse and requested that the additional money be used as extra payments on the loan
Not sure what type of evidence you have been looking out for, but people don't need to approach the bank in order for this to happen. In most cases this is simply the default action taken - i.e. customers have a set 'minimum monthly repayment' and when interest rates fall, that minimum repayment normally stays the same (unless the customer approaches the bank and asks for it to be reduced), meaning a greater proportion of that payment becomes principal rather than interest.
Generally agree miw but I would be cautious with that statement - the vast majority of people live a bit closer to the bone than you do on what I assume is a fairly high income.
Well, we are talking about people who are managing their mortgages, who are probably mostly not living on the edge.
BTW, having worked in high income and low income milieus, there is not as much correlation between income level and chance of living on the edge as you might think there should be.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Not sure what type of evidence you have been looking out for, but people don't need to approach the bank in order for this to happen. In most cases this is simply the default action taken - i.e. customers have a set 'minimum monthly repayment' and when interest rates fall, that minimum repayment normally stays the same (unless the customer approaches the bank and asks for it to be reduced), meaning a greater proportion of that payment becomes principal rather than interest.
How long has this been the case?
Doesn't that suggest that monetary policy should have very little discernible short-term effect on the economy as a stimulus? If falling interest rates do not make more disposable income available to the majority of borrowers except upon request, how do the RBA's actions stimulate the economy? Cheaper credit cards to go shopping with? Eventually the lower rates should entice more borrowing but for it to become a large and sustained surge that flows on into broad economic activity could take quite a while.
If what you say is true then it follows that most people only think that they are financially better off following a spate of rate cuts. After all, every cut has the newspapers and tv news declaring that this cut will save your typical borrower x amount per month. But no matter how much better off people might be fooled into believing they are, they still can't spend what they don't have without further borrowing. Any wave of spending that hits the shops in the wake of rate cuts would have to be credit-derived.
My bank sends me a letter following each rate cut, outlining what the new monthly payment will be. Not that I bank with any of the majors so perhaps not all lenders are alike.
This is all very interesting. Perhaps it's a phenomonen of the abnormally low (in the context of the past 40-odd years - I'm aware they were low previous to that) interest rates? With the majority of existing mortgages taken out before the beginning of this latest cutting cycle to lows not seen for half a lifetime, are the majority of existing borrowers now below some kind of threshold whereby monetary policy is doing the opposite to what is desired of it - creating effective saving rather than spending behaviour?
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customers have a set 'minimum monthly repayment' and when interest rates fall, that minimum repayment normally stays the same
Ok - so most "variable rate" mortgages are in fact not variable downward at all in a real sense but are pegged to a fixed, unchanging minimum repayment amount worked out at the prevailing rates on the day the loan was taken out that does not add disposable income when rates fall but nonetheless subtracts from it when rates rise past that particular point?
People on variable rate mortgages do not get a new, lower minimum monthly repayment when rates fall in the sense of it going into their actual pocket rather than the banks? But they are compelled to pay a higher monthly minimum when rates rise?
My bank sends me a letter following each rate cut, outlining what the new monthly payment will be. Not that I bank with any of the majors so perhaps not all lenders are alike.
One of my banks sens me a letter telling me what the new minimum payment is, but it is up to me to make the change to the payments, which is a simple internet action.
The other one tells me nothing unless the minimum payment goes up. By default they keep taking the same amount, and I have to get in touch with a banker to change it - a phone call transaction I think.
Lef-tee
5 Oct 2013, 04:26 PM
People on variable rate mortgages do not get a new, lower minimum monthly repayment when rates fall in the sense of it going into their actual pocket rather than the banks? But they are compelled to pay a higher monthly minimum when rates rise?
You do get a lower minimum monthly repayment, but mostly you need to do something in order to actually pay less. It's not hard, but for most people there is no perceived downside in not bothering.
You do get a lower minimum monthly repayment, but mostly you need to do something in order to actually pay less. It's not hard, but for most people there is no perceived downside in not bothering
I'm inclined to disagree there miw - if all this is the case then I strongly suspect that most people are under the impression that they automatically receive the cut as disposable income. That is certainly the way the media portrays it.
With most borrowers on variable rates, can you think of another reason why our political parties go to such torturous lengths to convince us that interest rates will be lower under them than under the other mob?
So essentially what you are saying is that most people who were paying say, $800 per week when variable rates were around 9% a number of years ago are still paying that amount instead of the $550 per week they could be paying at todays rates because they see no downside in not having the equivalent of nearly a third of a typical weeks wages available for day to day living expenses?
So essentially what you are saying is that most people who were paying say, $800 per week when variable rates were around 9% a number of years ago are still paying that amount instead of the $550 per week they could be paying at todays rates because they see no downside in not having the equivalent of nearly a third of a typical weeks wages available for day to day living expenses?
Your imagined downside is not present.
The money IS available for day to day living expenses... it's in the redraw facility!
The 'buffers' we are discussing are comprised of the extra principal repayments which are building up and available on-demand in the mortgage redraw facility, available for day to day living expenses, future interest repayments in case of unemployment, buying a car, going on holiday, or whatever else the borrower decides to spend it on. They can redraw and spend all of it, or part of it, or they can decide not to spend any of it and just let it build up into a huge buffer.
There is no difference in fund availability between the extra repayments sitting in the redraw, versus savings sitting in a traditional savings account. Either way, the funds are equally available to be saved or spent as decided by the borrower. In your example above, the extra $350 per week is available for day to day living expenses.
However, it makes more sense financially to store the extra funds in the mortgage redraw buffer, since the interest rate here will be higher than what could be achieved through a traditional savings account.
Seriously, this is not complicated. I don't see why you're having so much difficulty getting your head around it.
I'm inclined to disagree there miw - if all this is the case then I strongly suspect that most people are under the impression that they automatically receive the cut as disposable income. That is certainly the way the media portrays it.
I suspect that most people, when they look at the loan statement and see the interest charge has gone down and the cash available for redraw has gone up, *would* say that their disposable income has just gone up. It's not rocket surgery.
A portion do dispose of it on iphones and holidays, but a goodly portion obviously do not increase their spending on consumption and instead let the buffer build up. And some do something in between.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
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