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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
Topic Started: 6 Sep 2013, 08:49 AM (9,749 Views)
Sherlock
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14 per cent in offset & redraw, and an authoritative in the RBA -- bears pawned!!
Edited by Sherlock, 6 Sep 2013, 09:05 PM.
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Lef-tee
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People don't generally talk about what % of their disposable income they pay to service the mortgage - but I can't actually think of anybody I know who pays less than 10%.

Yet the suggestion seems to be that your typical mortgage holder pays what for most people would be considered an almost trivial portion of their income.

If this is the case, it seems curious that housing is not undergoing the mother of all booms.
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Lef-tee
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Leaving aside offset accounts for the moment and focussing on redraw facilities - is the money in redraw facilities being classed as a part of this roughly 2-year buffer that most people are apparently ahead by?

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Redraw is simpler for most people... you just transfer all your pay into the mortgage and then redraw what you need to live on each month.


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Redraw is simple - you just pay more than necessary into the home loan each month.


If it is, I can't see why it should be. You may be technically in advance on your home loan by that amount but most of that money is not available as a buffer to pay the mortgage if push were to come to shove because it's your living wage. Over the course of the month, most people will spend most of it on food, clothing, petrol, electricity, general living expenses etc. The only way that money would all be available to pay the mortgage is if you ate grass and walked everywhere.

Any one statistical snapshot in time would invariabley capture a large number of people who were miles ahead on their home loan in a technical sense because they had not yet consumed the buffer with their monthly living expenses. If you could capture each individual a few days before monthly redraw day and add up what everyone had left over (impossible of course) that might give a better indication of the true size of the average buffer.
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peter fraser
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Lef-tee
7 Sep 2013, 06:59 AM
Leaving aside offset accounts for the moment and focussing on redraw facilities - is the money in redraw facilities being classed as a part of this roughly 2-year buffer that most people are apparently ahead by?


If it is, I can't see why it should be. You may be technically in advance on your home loan by that amount but most of that money is not available as a buffer to pay the mortgage if push were to come to shove because it's your living wage. Over the course of the month, most people will spend most of it on food, clothing, petrol, electricity, general living expenses etc. The only way that money would all be available to pay the mortgage is if you ate grass and walked everywhere.

Any one statistical snapshot in time would invariabley capture a large number of people who were miles ahead on their home loan in a technical sense because they had not yet consumed the buffer with their monthly living expenses. If you could capture each individual a few days before monthly redraw day and add up what everyone had left over (impossible of course) that might give a better indication of the true size of the average buffer.
I don't think that the buffer was measured on the day that everyone received their salary payment direct to their loan. You are grasping at straws.

You ask why those with large redraws aren't piling into property - age is the factor here. The largest buffers are held by the oldest cohort (quite logically) and they are the boomers. Generally they are past the age of investment property acquisition.

The property investors now are Gen X and Gen Y.
Any expressed market opinion is my own and is not to be taken as financial advice
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Lef-tee
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the RBA’s recent Financial Stability Review that seemed to suggest that the chart above might not tell the full story. According to the chart below, Australians hold about 14% of outstanding home loans in offset or redraw facilities. This is equivalent to about 21 months of interest payments. This is new data that I don’t believe the market has previously been made aware of. Previous Financial Stability Reviews have not provided this statistic. The redraw and offset account facilities are an important feature of the Australian housing market.


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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.


In what way do these accounts represent saving?

Savings are something put aside just in case or with a specific longer-tern goal in mind. Something that has been set aside, is not generally touched - a different thing to money used for day-to-day living.

Something you are going to use up on general living expenses over the course of the month is not savings - it would be better regarded as a monthly paycheck. If the person became unemployed, how much of this buffer would evaporate in the space of a few weeks?

Perhaps I have misread it but it seems as though the ABS is right to not subtract them.

It also appears to suggest that the actual buffer may be very much lower.
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I don't think that the buffer was measured on the day that everyone received their salary payment direct to their loan. You are grasping at straws.


Peter, could you explain it to me more clearly then? I didn't say that everyone happened to get paid on the same day the survey was taken. What I'm saying is that money in such redraw accounts already has an allocated, non-discretionary (for the most part) purpose - most of it is a living wage, not a savings or mortgage buffer in the real sense of the word.
What I'm asking is, when our combined pay goes into our home loan redraw facility - do the RBA and APRA regard this as what I am in adavance on my mortgage by after the actual minimum monthly payment is subtracted?

Because on Monday I'm going to have a nice fat "mortgage buffer" there but by halfway through the month it will be looking rather leaner because much of it is my living wage.

That's all I'm asking.
Edited by Lef-tee, 7 Sep 2013, 07:49 AM.
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peter fraser
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Lef-tee
7 Sep 2013, 07:30 AM

Peter, could you explain it to me more clearly then? I didn't say that everyone happened to get paid on the same day the survey was taken. What I'm saying is that money in such redraw accounts already has an allocated, non-discretionary (for the most part) purpose - most of it is a living wage, not a savings or mortgage buffer in the real sense of the word.
What I'm asking is, when our combined pay goes into our home loan redraw facility - do the RBA and APRA regard this as what I am in adavance on my mortgage by after the actual minimum monthly payment is subtracted?

Because on Monday I'm going to have a nice fat "mortgage buffer" there but by halfway through the month it will be looking rather leaner because much of it is my living wage.

That's all I'm asking.
people are 21 months in advance of their payments.
Yep sure you could argue that the last weeks payments or the last fortnights payment may be largely withdrawn but that's not 21 months.

You should be glad that your fellow Australians are well in advance with their repayments. I see it as a logical result of lower interest rates and a budget deficit.
Any expressed market opinion is my own and is not to be taken as financial advice
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Lef-tee
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people are 21 months in advance of their payments.


Which people exactly? The RBA seems to be rolling these figures into the total to derive an average.

Something is either surplus to immediate requirement or it is not. The RBA and the article itself seem to be treating both as though they were the same thing here.

The article appears to argue that all monies held in redraw and offset accounts at any one point in time should be regarded as surplus to immediate requirement and therefore the equivalent of savings/mortgage buffer. Having assumed that premise as fact, it then extrapolates the situation further to argue that your typical Australian is therefore a very long way ahead on their mortgage and pays a mere 8% of their disposable income to service it. Now having assumed that this is a fact, it argues that this therefore means that household debt is much lower than the official figure since so many people have so much "surplus cash" sitting in such facilities.

Given that such facilities have been making up an increasing percentage of mortgage loans (as the article notes), couldn't counting 14% of all mortgage holders entire monthly incomes (regardless of what stage of the month different people were at) as payments in advance, savings or whatever other term you can think of for surplus to immediate requirement, why couldn't that skew the figures?

And is the fact that the ABS discounts them merely a serious oversight on their part or do they deliberately discount them for that very reason?
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peter fraser
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Lef-tee
7 Sep 2013, 08:23 AM


Which people exactly? The RBA seems to be rolling these figures into the total to derive an average.

Something is either surplus to immediate requirement or it is not. The RBA and the article itself seem to be treating both as though they were the same thing here.

The article appears to argue that all monies held in redraw and offset accounts at any one point in time should be regarded as surplus to immediate requirement and therefore the equivalent of savings/mortgage buffer. Having assumed that premise as fact, it then extrapolates the situation further to argue that your typical Australian is therefore a very long way ahead on their mortgage and pays a mere 8% of their disposable income to service it. Now having assumed that this is a fact, it argues that this therefore means that household debt is much lower than the official figure since so many people have so much "surplus cash" sitting in such facilities.

Given that such facilities have been making up an increasing percentage of mortgage loans (as the article notes), couldn't counting 14% of all mortgage holders entire monthly incomes (regardless of what stage of the month different people were at) as payments in advance, savings or whatever other term you can think of for surplus to immediate requirement, why couldn't that skew the figures?

And is the fact that the ABS discounts them merely a serious oversight on their part or do they deliberately discount them for that very reason?
Perhaps the ABS and the RBA are conforming to international standards which don't take Australian differences into account. It would be logical though for them to note that difference so that we could all take it into account even if we couldn't quantify that difference.

Seriously there are a lot of people who are well in advance in their repayments, which frankly is normal for long term mortgage holders. Although people are taking loans over 30 years, they are in fact paying them out in about 20 years. That conforms with what I see and it's perfectly logical. People who get a loan when they are young get wage rises and promotions that over time minimise their repayments as a proportion of their income.

Also when the kids leave home their financial burden reduces significantly when they are at peak income potential. Anyone who buys a house that they can afford the repayments on at 30 is in a sweet spot when they are 50.
Any expressed market opinion is my own and is not to be taken as financial advice
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Shadow
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Lef-tee
7 Sep 2013, 06:59 AM
You may be technically in advance on your home loan by that amount but most of that money is not available as a buffer to pay the mortgage if push were to come to shove because it's your living wage. Over the course of the month, most people will spend most of it on food, clothing, petrol, electricity, general living expenses etc. The only way that money would all be available to pay the mortgage is if you ate grass and walked everywhere.
No, I don't think you get it. People are building the buffers every month by paying more than they need into the mortgage, and only redrawing what they need to live on. A paycheck of say $5000 comes in each month. They transfer it all to the mortgage. $2000 pays off that month's interest. Another $500 pays off that month's required principal. Another $1500 is redrawn over the month as living expenses. Net result $1000 added to the buffer every month. Leading to the current situation where the average person is 21 months ahead.

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Over the course of the month, most people will spend most of it on food, clothing, petrol, electricity, general living expenses etc.
No, the whole point is they don't spend it all... they let it build up every month into a large buffer.
Edited by Shadow, 7 Sep 2013, 08:59 AM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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willy_nilly
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Our currents high savings rate is the buffer.
peter fraser
7 Sep 2013, 07:18 AM
I don't think that the buffer was measured on the day that everyone received their salary payment direct to their loan. You are grasping at straws.

You ask why those with large redraws aren't piling into property - age is the factor here. The largest buffers are held by the oldest cohort (quite logically) and they are the boomers. Generally they are past the age of investment property acquisition.

The property investors now are Gen X and Gen Y.
Peter
Go back a page and read the data on how boomers are going into retirement in debt.
willy_nilly
7 Sep 2013, 08:55 AM
Our currents high savings rate is the buffer.

Peter
Go back a page and read the data on how boomers are going into retirement in debt.
http://www.smh.com.au/national/more-baby-boomers-still-paying-off-the-house-20130817-2s3yp.html
Edited by willy_nilly, 7 Sep 2013, 09:05 AM.
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