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 (9,752 Views)
From a household perspective, these accounts represent savings or less debt. From a statistical perspective, however, the value of savings in offset or redraw accounts are not subtracted from the level of outstanding debt because the line of credit remains open. By including the pre-payments in the household debt to income ratio, the numerator falls by $200bn, putting the ratio at 127%, some 20ppts lower than the current level. The cost of debt servicing falls to around 8% of disposable income.
This is interesting and if you read the last couple of reports from the RBA they do struggle with the fact that the debt to income sits at 150%. I wonder how common offset accounts are in Europe and elsewhere.
I recently used some contacts to get one of the major banks to tally the total amount sitting in offset accounts relative to the mortgage book - and that number was only 3% ($10bn on $300bn). It didn't seem right to me, but the bank in question was adamant the number was right.
Did you ask specifically for offsets only? Or also redraw facilities?
This is an important point - I ask for offsets only. I would have thought offsets would be a bigger number.
Note, Australia is unique in having offset accounts. So it is likley it does not get picked up by the RBA in the credit aggregates.
Edit: I will go back and ask today. (It took a few weeks to get an answer last time).
A Redraw facility is almost universal in variable mortgages in Australia, and variable mortgages are the loan of choice. Even when people do fix loans they usually leave a portion variable specifically so that they can use the redraw facility.
Offsets are useful for investors if they need to quarantine tax deductible debt, but for the majority of Australians who have an PPOR home loan it really doesn't matter - a redraw is really very useable. Many loans specifically encourage salary crediting and have the surplus available on plastic when they go shopping.
I think that you will find the missing money in the redraw accounts.
Any expressed market opinion is my own and is not to be taken as financial advice
Also most people don't know about the tax advantages of using offset if you later decide to turn the PPOR into an IP, so they just pay off the PPOR mortgage as fast as possible.
A Redraw facility is almost universal in variable mortgages in Australia, and variable mortgages are the loan of choice. Even when people do fix loans they usually leave a portion variable specifically so that they can use the redraw facility.
Offsets are useful for investors if they need to quarantine tax deductible debt, but for the majority of Australians who have an PPOR home loan it really doesn't matter - a redraw is really very useable. Many loans specifically encourage salary crediting and have the surplus available on plastic when they go shopping.
I think that you will find the missing money in the redraw accounts.
Perhaps - I will find out over the next week or so.
I have always used offset accounts for my PPOR, so I guess that is why I thought it would hve been more common.
But it seems to me a redraw facility actually reduces the notional mortgage (say from $100 to $90). When money is drawn the amount increases again (from $90-$100). Am I right?
I can not see how the RBA would miss this in the aggregates since the asset on the bank balance sheets move from period to period.
Conversely, I could have $100 in mortgage and $10 in cash offset - and can then use the cash to buy an item and the mortgage (and bank assets) remains unchanged.
Perhaps - I will find out over the next week or so.
I have always used offset accounts for my PPOR, so I guess that is why I thought it would hve been more common.
But it seems to me a redraw facility actually reduces the notional mortgage (say from $100 to $90). When money is drawn the amount increases again (from $90-$100). Am I right?
I can not see how the RBA would miss this in the aggregates since the asset on the bank balance sheets move from period to period.
Conversely, I could have $100 in mortgage and $10 in cash offset - and can then use the cash to buy an item and the mortgage (and bank assets) remains unchanged.
I can see how the RBA can miss this.
It's difficult to say, except that banks count "lending commitments" not actual loans in existence according to yossarian, who works for a bank.
In your case the bank may be counting the full $100 because that's what it can be drawn to.
Any expressed market opinion is my own and is not to be taken as financial advice
It's difficult to say, except that banks count "lending commitments" not actual loans in existence according to yossarian, who works for a bank.
In your case the bank may be counting the full $100 because that's what it can be drawn to.
That is not quite correct. He may be referring to a lending commitment which is included for the purposes of calculating risk weightings (which are not disclosed in the financial accounts). But a lending commitment is not an asset on a banks balance sheet (and I think it is the assets which the RBA aggregates).
A bank may commit to a $100 loan - but it only becomes an asset when the loan and corresponding deposit is created.
But it seems to me a redraw facility actually reduces the notional mortgage (say from $100 to $90). When money is drawn the amount increases again (from $90-$100). Am I right?
I can not see how the RBA would miss this in the aggregates since the asset on the bank balance sheets move from period to period.
Say I have a P&I mortgage that begins with a $500K limit, $500K drawn, and in the first month I'm required to pay $2000 interest plus $100 principal.
Instead I pay $5000 into the mortgage.
Now the mortgage has a $499,900 limit, $497,000 drawn, and a redraw buffer of $2900.
(on a P&I mortgage the loan limit is reduced each month by the required principal repayment - you can't redraw this bit)
I expect the bank will have to report an outstanding mortgage commitment of $499,900, because the extra $2900 buffer could disappear at any time - I could withdraw it tomorrow.
This ties in well with macro over the past 5 years. Government deficits, domestic investment, and a narrowing of the CAD all add to savings - yet the debt / income charts did not show it.
Plenty of people here have suggested offset accounts and re-draws explained the difference (I think Sydneyite was onto this a couple of years ago).
Yes - excellent find. As you say I have been speculating about this for a couple of years now - I was derided by some bears for raising this as well!
To Pauks point - you cannot ignore this. I personally am a classic example - I consider that I own my house outright, because I have an offset account which is 100% = to my mortgage. The bank and the RBA consider me to still be a mortgage holder. More complexity again is added if you use your house as security for LOC loans that are then used for other investment purposes, like share portfolios, business funding etc - I also do this as the interest rate is cheaper than margin or business loans, and there are no margin calls so I can ride out market volatility without any fear of being a forced seller at the bottom.
More complexity again - my "investment" LOC acount is also technically 100% offset, and then some! Ie I could pay that loan off tomorrow with other cash we have sitting in other bank accounts, but don't, as I actually make money (essentially risk free) from the spread between the after tax cost of the interest on the LOC account (held in my name) and the after tax interest income from the cash held in my wifes name in high interest savings accounts - she's on a lower marginal tax rate than me. Ah the nuances of Australia's massively over-complex taxation system!
My sister/brother-in-law have a paid off house with 100% offset account and mortgage still running as well. There are loads of people who do this sort of stuff, and it all results in more aggragate household debt showing in stats than is the case if you netted all this stuff out.
Quote:
The only problem I have is I recently used some contacts to get one of the major banks to tally the total amount sitting in offset accounts relative to the mortgage book - and that number was only 3% ($10bn on $300bn). It didn't seem right to me, but the bank in question was adamant the number was right.
I wonder if this was CBA? If yest it might explain it, as it sounds like (until now) they didn't have a decent offset facility available, so hardly anyone used the one they had? ANZ, NAB have had better products for some time I think.
Yes - excellent find. As you say I have been speculating about this for a couple of years now - I was derided by some bears for raising this as well!
To Pauks point - you cannot ignore this. I personally am a classic example - I consider that I own my house outright, because I have an offset account which is 100% = to my mortgage. The bank and the RBA consider me to still be a mortgage holder. More complexity again is added if you use your house as security for LOC loans that are then used for other investment purposes, like share portfolios, business funding etc - I also do this as the interest rate is cheaper than margin or business loans, and there are no margin calls so I can ride out market volatility without any fear of being a forced seller at the bottom.
More complexity again - my "investment" LOC acount is also technically 100% offset, and then some! Ie I could pay that loan off tomorrow with other cash we have sitting in other bank accounts, but don't, as I actually make money (essentially risk free) from the spread between the after tax cost of the interest on the LOC account (held in my name and the after tax interest income from the cash (held in my wifes name in high interest savings accounts - she's on a lower marginal tax rate than me). Ah the nuances of Australia's massively over-complex taxation system!
My sister/brother-in-law have a paid off house with 100% offset account and mortgage still running as well. There are loads of people who do this sort of stuff, and it all results in more aggragate household debt showing in stats than is the case if you netted all this stuff out.
I wonder if this was CBA? If yest it might explain it, as it sounds like (until now) they didn't have a decent offset facility available, so hardly anyone used the one they had? ANZ, NAB have had better products for some time I think.
Actually this link was posted by 3d1k over at macrobusiness, so hat tip to 3d1k.
To add to the vagueness of the stats, I have a number of customesr who have paid out their loans in full, but let the loan sit with a zero balance because they can redraw the loan at any time - that's using their redraw not their offset.
Technically they still have a mortgage to a bank - but they owe zip.
Whenever I see the stats showing that more people over 55 have a mortgage than they used to before these products were available, I always wonder if it is really any different, or just the illusion created by the better loan product options on the market.
In years gone by as soon as the loan was repaid the bank would sign a discharge of the mortgage, post it to the client, and get the loan off its books asap - but now they let the loan sit there with a zero balance.
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