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 (9,748 Views)
Seriously there are a lot of people who are well in advance in their repayments, which frankly is normal for long term mortgage holders.
I don't doubt that's the case Peter.
But unless I've read it wrong, the article suggests that your typical mortgage holder is nearly 2 years in advance and pays a mere 8% of their disposable income in servicing costs. I struggle to accept this on face value, particularly the 8% part. My household is right in the middle of the income distribution, has a tiny mortgage compared with what is typical today, is paying some of the lowest interest rates in a good 40 years or longer, are pretty prudent IMO but are still not able to achieve what the typical person apparently achieves with ease, despite them having massive mortgages by comparison. Something is not ringing true.
I also wonder if such mortgages are evenly distributed along the income scale. Are such products more concentrated among particular income sectors? Do more people in the upper half of the income spectrum operate such facilities than people in the lower half? If so that would likely skew it further.
Based on what I see so far, I think we can probably say that it is difficult to gauge exactly how far about 15% of all mortgages may or may not be in advance - a long way in advance, some way in advance, barely in advance .....I can't really see how you can tell for certain because you can't really sort out what is saving and what is going to be spent over the month.
But if we are going to count the entire household incomes of 14% of all mortgage holders as savings or advance payments and then add that to the total to derive an average, I think we should assume that the resulting figures are likely to be seriously skewed.
Shadow
7 Sep 2013, 08:53 AM
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.
No, the whole point is they don't spend it all... they let it build up every month into a large buffer.
I think you're assuming people have more spare cash than they do to not have to draw back on.
Or perhaps such facilities are more common among people in the upper half of the income spectrum.Plus you've said that the average person is nearly 2 years ahead - but only 14% operate such facilties.
Plus you've said that the average person is nearly 2 years ahead - but only 14% operate such facilties.
You have misinterpreted the 14% figure.
14% is the aggregate proportion of total mortgage debt in offset or redraw buffers.
Not the proportion of people who operate such facilities (that would be closer to 100% of people on variable mortgages). Remember, as interest rates fall, banks don't automatically reduce the minimum monthly payment, so even if people aren't deliberately creating redraw buffers, they are doing it by default unless they contact their bank each time rates fall and request a reduction in their minimum repayment. With rates at current levels, almost everyone with a variable mortgage is building a redraw buffer by default.
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I think you're assuming people have more spare cash than they do to not have to draw back on.
I'm not assuming anything, I'm simply telling you what the RBA data says.
14% of mortgage debt is held in offset or redraw buffers,which equates to a 21 month buffer for the average person.
A couple with kids we know tried living on $600 per week while they paid for an IP but were literally stoney broke and miserable. Happily, they were able to sell the IP and get ahead.
We've been operating a home loan redraw facility for some years and while we've done well and seem to have knocked the mortgage down a fair bit more quickly than under the old standard loan type we originally had, I can't recall that we were ever a lot more than a year ahead nor paid as little as 8% of disposable income - while your typical borrower is apparently nearly 2 years ahead and pays a pittance to service a mortgage very much larger than mine. This "typical" borrower seems far from typical to me.
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According to the chart below, Australians hold about 14% of outstanding home loans in offset or redraw facilities.
Perhaps I'm misinterpreting it but it appears to say 14% of home loans, not 14% of total mortgage debt.
We've been operating a home loan redraw facility for some years...
This "typical" borrower seems far from typical to me...
That's because you are extrapolating your narrow experience to the rest of the country.
When I bought my first home we paid a 35% deposit and within two years we had paid an extra $200,000 into redraw on top of the required P&I repayments. And this was when mortgage rates were at 8-9%. That gave us a buffer of about 8 years.
(in hindsight it would have been better to pay the extra $200K into offset, since I now have $200K that's not tax deductible now that the PPOR is an IP, but you live and learn).
Of course, I'm at the other end of the spectrum, and I can't extrapolate my experience to the rest of the country either.
The RBA data tells about the aggregate position, which understandably falls somewhere between each of our own personal experiences.
The ABS tells me that I am very much a typical household. However, other data is saying that other "typical" households are experiencing conditions very different to the ones I am familiar with. Either I am far from typical or statistical methods are giving a misleading impression about what really constitutes typical.
I remain curious as to why the article appears to insist that the RBA is measuring home loans, not mortgage debt. And I wouldn't be at all surprised if it transpired that a higher proportion of people in the upper half of the income spectrum operated such loan facilities compared to the rest of outstanding home loans.
I have yet to reach a firm conclusion on this issue.
Various data sources suggest that around half of borrowers are ahead of schedule on their mortgage.
So the typical household which is so far ahead isn't really typical at all since only around 50% are actually ahead by any significant amount. The argument that households who are ahead on their mortgage are broadly representitive of the whole is misleading since it tends to give the impression that households without a significant buffer constitute only a small minority when in fact around half appear to have almost no buffer at all.
Only a small percentage of borrowers appear to have the size buffer suggested by the average given.....
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Measured a different way, in aggregate, indebted households' mortgage prepayment buffers are estimated to be equivalent to around 1½ years of scheduled repayments (principal plus interest) based on current interest rates. While this average figure is boosted by a group of borrowers that are significantly ahead of schedule – liaison with the major banks suggests that around 15 per cent of borrowers are ahead by two years or more
But here's some better news....
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many borrowers still have sizeable buffers. Of those borrowers that are ahead on their mortgage: around 45 per cent are estimated to have a buffer of up to six months; 15 per cent have a buffer of between six months and a year; and over 40 per cent have a buffer greater than one year's repayments (Graph B2).
Looks like I fall into that 15% - at least in that way I'm a bit less typical than I thought.
As I suspected, solid-sized buffers appear to be concentrated in the upper part of the income spectrum.....
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Data from the HILDA Survey suggest that households with large mortgage buffers tend to be older and have higher incomes
This sounds like good news....
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The bulk of households that are not ahead of schedule on their mortgage are not in financial stress; roughly half of indebted households are paying their mortgages on schedule, with only a very small share of borrowers in arrears.
....but it might be difficult to measure such a thing quantitatively.
The best bit.....
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over half of owner-occupiers are estimated to be ahead on their mortgage compared with less than 40 per cent of investors
That certainly is good news. At least for a bit more than half anyway.
This data is about 12 months old and things will have improved since then for anyone who already had a mortgage with the fall in interest rates. For those yet to buy, prices have been rising solidly again which would offset some of the lower interest rate gain.
So it appears that your typical borrower does not in fact have a large buffer, though perhaps a quarter have a buffer that is probably satisfactory (however you define that). But being out of work for six months would see the great bulk of borrowers in trouble. The "typical" borrower who manages to build large buffers and pay only a pittance in mortgage costs despite having a large mortgage appears to represent only a minority of borrowers.
This data is about 12 months old and things will have improved since then for anyone who already had a mortgage with the fall in interest rates.
Yes, a bit out of date... the latest indications are that around 65-90% of borrowers have been building buffers since 2011 (on top of the existing buffers already built by 50% of borrowers as per the earlier RBA report). So it seems the vast majority would have some sort of buffer right now, with the aggregate data showing 14% of mortgage debt is 'buffered', and the average buffer being able to cover 21 months worth of required payments.
All in all, a very solid position for the majority of borrowers. It certainly helps explain why Australian house prices keep rising (contrary to all the permabear doom & gloom predictions), and why our mortgage default rates are so low... most borrowers are able to service their debts extremely comfortably, and are sitting in a very strong position.
MORE than 90 per cent of some lenders' mortgage customers have not reduced their repayments since 2011 when the RBA began the process of slashing the cash rate to the lowest level ever.
This is in part because homeowners have chosen to not spend the extra cash that becomes available to them when their minimum mortgage repayment falls.
Instead they are maintaining their repayments, building up a war chest in the event of further economic turmoil.
"They don't adjust as the rate goes down," Dr Oliver said. "They are still paying the same dollar amount."
Typically when a lender reduces its variable rates in response to an RBA cut, the lender will not reduce a mortgage customer's repayments - unless the customer asks.
The Greater Building Society, one of the largest in the country, says that at least nine in 10 home loan customers haven't asked.
That means they are still repaying the same amount as they were in 2011, when the Reserve Bank of Australia began a series of cuts that has reduced its benchmark rate from 4.75 per cent to 2.75 per cent.
A spokesman for market no.1 CBA said 65 to 70 per cent of its variable-rate customers "have not reduced their repayments" since 2011.
RBA data suggests homeowners are about $160 billion ahead on their mortgages, squirrelling away an extra $30 billion since the start of the global financial crisis.
There is the very big possibility of sample error. Outliers can be very out.
Really these supposed "Facts" are guesses, probably good ones but still guesses.
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