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 (9,746 Views)
I see that nothing seems to have been definatively solved in my absence.
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I think this depends on your bank. Suncorp does automatically adjust minimum payments as interest rates rise and fall and the amount in cashback (redraw) changes. On the other hand, it seems that NAB does not make adjustments (at least not downward ones.)
Yes, Bendigo seems to do this as well. They sent us a letter after the last rate cut outlining what our new payment would be. Though perhaps that's related to the kind of home loan as well, not just the bank.
All in all, I remain strongly of the opinion that the argument that your typical borrower has a very large buffer and pays an almost insignificant amount of money in servicing costs despite having a mortgage that absolutely dwarfs those of 10 or more years ago represents some kind of statistical artefact rather than the typical on-the-ground reality. It seems to suggest that either your average borrower is paying about $100 per week in mortgage servicing costs or that the average borrower has a household income typical of mining sector wages. I think it would take a stretch of the imagination to argue that either is the case.
Perhaps something to consider might be that mortgages are not generally paid out in five years - many people who took out a mortgage 25 years ago are still paying it off. By rolling all outstanding mortgages into the equation, the majority of them will have been taken out before the house price boom, which would serve to drag down average figures. What it costs your typical borrower now is what matters, not what it costs those who took out the mortgage 15 or 20 years ago.
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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.
The Greater Building Society, one of the largest in the country, says that at least nine in 10 home loan customers haven't asked.
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.
This is very interesting. Is this an innovation of more recent times? Because on the face of it, it suggests that monetary policy should have next to no short-term effect on the economy overall.
For as long as I can remember, people have hung out for the RBA's monthly decision to find out whether their cost of living will be going up or down. So significant is it that political parties are always at pains to convince us that interest rates will be lower under them. Yet this suggests that having more money in your pocket when rates go down and less when they go up is merely a figment of millions of people's collective imagination - one so powerful that it can help to make or break national governments.
I see that nothing seems to have been definatively solved in my absence.
Yes, Bendigo seems to do this as well. They sent us a letter after the last rate cut outlining what our new payment would be. Though perhaps that's related to the kind of home loan as well, not just the bank.
All in all, I remain strongly of the opinion that the argument that your typical borrower has a very large buffer and pays an almost insignificant amount of money in servicing costs despite having a mortgage that absolutely dwarfs those of 10 or more years ago represents some kind of statistical artefact rather than the typical on-the-ground reality. It seems to suggest that either your average borrower is paying about $100 per week in mortgage servicing costs or that the average borrower has a household income typical of mining sector wages. I think it would take a stretch of the imagination to argue that either is the case.
Perhaps something to consider might be that mortgages are not generally paid out in five years - many people who took out a mortgage 25 years ago are still paying it off. By rolling all outstanding mortgages into the equation, the majority of them will have been taken out before the house price boom, which would serve to drag down average figures. What it costs your typical borrower now is what matters, not what it costs those who took out the mortgage 15 or 20 years ago.
This is very interesting. Is this an innovation of more recent times? Because on the face of it, it suggests that monetary policy should have next to no short-term effect on the economy overall.
For as long as I can remember, people have hung out for the RBA's monthly decision to find out whether their cost of living will be going up or down. So significant is it that political parties are always at pains to convince us that interest rates will be lower under them. Yet this suggests that having more money in your pocket when rates go down and less when they go up is merely a figment of millions of people's collective imagination - one so powerful that it can help to make or break national governments.
Most home loans have a 25 or 30 year cycle. As the kids leave home most people put more into repaying their mortgage as the financial stress of raising a family diminishes, and the loan term reduces.
Most loans on the books of major lenders like the CBA haven't been written in the last few years. I see the first 5 years as being difficult for many young families, but after that it becomes much easier. I don't think that you give appropriate recognition to the borrowers who have made it through the first 5 years and now find the repayments much easier to manage, and so they choose to either salary credit, or pay extra using that as their savings buffer.
To say that people are not accumulating money in their redraws is suggesting that they are foolish, in my experience the average person is reasonably responsible with money and they are not foolish. Don't believe the verbiage sprouted elsewhere suggesting that all renters are rolling in dough and all home owners are on the verge of bankruptcy - it's not like that at all, and I see the balance sheets. Even a non homeowner with good savings of $100K can't match the balance sheet of a homeowner who has owned for 10 years. The difference is quite marked, and if the non-homeowner has more modest savings of maybe $30K then its a pronounced difference in both the asset position and the income/liabilities position.
Any expressed market opinion is my own and is not to be taken as financial advice
I didn't say that people were not accumulating any money in redraw facilities Peter - I am doing it myself.
I am simply casting scepticism on the interpretation of the figures which purport to show that your typical borrower is financially living the life of Riley.
I don't doubt that the financial burden eases when the kids leave home but how many leave home and get a job at 5 years old? Mine is still with us at 12 years old and will be here for some years yet as a total financial dependent. He is not costing any less than when he was 5.
I spoke with a conveyencer today regarding these claims. Ok, not a mortgage broker or a loans officer but someone who nonetheless associates through work with people in the mortgage lending industry. She cannot fathom how your typical borrower could really be paying such a trivial sum as 8% of their after-tax income to service a typical mortgage. She agrees that such an interpretation of the figures likely does not represent the broader on-the-ground reality.
But do you know if this non-adjustment of the payment of variable-rate mortgages has been around a long time or only in recent years? Because it may go some way toward explaining why it has taken so much cutting for the economy to respond to lower interest rates. If rate cuts are automatically going on paying down debt rather than on bolstering consumer spending, it suggests that monetary policy is now a very weak tool indeed in the sense that 25bp cuts will likely have virtually no effect and that it may take a good 150 bp to spur growth through additional new lending. If this is the case........I think the RBA might have only one bullet left in the gun if they are lucky.
This has opened up a very interesting line of enquiry for me - whatever you might think, I'm glad I "clutched" at this particular "straw".
I didn't say that people were not accumulating any money in redraw facilities Peter - I am doing it myself.
I am simply casting scepticism on the interpretation of the figures which purport to show that your typical borrower is financially living the life of Riley.
I don't doubt that the financial burden eases when the kids leave home but how many leave home and get a job at 5 years old? Mine is still with us at 12 years old and will be here for some years yet as a total financial dependent. He is not costing any less than when he was 5.
I spoke with a conveyencer today regarding these claims. Ok, not a mortgage broker or a loans officer but someone who nonetheless associates through work with people in the mortgage lending industry. She cannot fathom how your typical borrower could really be paying such a trivial sum as 8% of their after-tax income to service a typical mortgage. She agrees that such an interpretation of the figures likely does not represent the broader on-the-ground reality.
But do you know if this non-adjustment of the payment of variable-rate mortgages has been around a long time or only in recent years? Because it may go some way toward explaining why it has taken so much cutting for the economy to respond to lower interest rates. If rate cuts are automatically going on paying down debt rather than on bolstering consumer spending, it suggests that monetary policy is now a very weak tool indeed in the sense that 25bp cuts will likely have virtually no effect and that it may take a good 150 bp to spur growth through additional new lending. If this is the case........I think the RBA might have only one bullet left in the gun if they are lucky.
This has opened up a very interesting line of enquiry for me - whatever you might think, I'm glad I "clutched" at this particular "straw".
Your conveyance is seeing new loans for home buyers, she isn't seeing the older loans held by borrowers who have been in their house for some time and have had the repayments inflated lower due to rising incomes and inflation.
My point above was that new buyers didn't have this luxury at all, but it does accumulate. I see a lot of people on their late forties or early fifties with less that $100K owing on their home. They are paying maybe $700 per month on their loan.
For a couple with two wages that is a zip, is it not?
Any expressed market opinion is my own and is not to be taken as financial advice
Your conveyance is seeing new loans for home buyers, she isn't seeing the older loans held by borrowers who have been in their house for some time and have had the repayments inflated lower due to rising incomes and inflation.
Actually, she has been in conveyancing for around 40 years (now part-retired). But that is exactly one of the points I was making - the data is likely an average of all outstanding mortgages, including people like your example and myself. These loans are not problematical and should be easily able to be serviced. The point is what it costs peoplenow, and that will not be reflected in data that averages 25 or 30 years worth of mortgages. It is very clear that first-timers are now having difficulty getting their foot in the door and anecdotally, are more and more giving up on the idea of ever owning detatched housing as their parents and grandparents did and moving to buy units and townhouses instead.
Again Peter, what do you think of the question I posed regarding whether or not falling rates going automatically toward paying down the mortgage instead of going toward the borrowers disposable income is a recent innovation? As a mortgage broker, I was imagining you would have pretty close to first-hand knowledge here.
But that is exactly one of the points I was making - the data is likely an average of all outstanding mortgages, including people like your example and myself.
Likely? Of course the aggregate data includes all mortgages. I thought that was pretty clear.
Is that what this has been all about... you thought the data only covered FHBs or something... people who just bought in the last year?
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These loans are not problematical and should be easily able to be serviced.
Judging by mortgage default rates, about 99.4% of loans are able to be serviced (home loan arrears are around 0.6%).
Actually, she has been in conveyancing for around 40 years (now part-retired). But that is exactly one of the points I was making - the data is likely an average of all outstanding mortgages, including people like your example and myself. These loans are not problematical and should be easily able to be serviced. The point is what it costs peoplenow, and that will not be reflected in data that averages 25 or 30 years worth of mortgages. It is very clear that first-timers are now having difficulty getting their foot in the door and anecdotally, are more and more giving up on the idea of ever owning detatched housing as their parents and grandparents did and moving to buy units and townhouses instead.
Again Peter, what do you think of the question I posed regarding whether or not falling rates going automatically toward paying down the mortgage instead of going toward the borrowers disposable income is a recent innovation? As a mortgage broker, I was imagining you would have pretty close to first-hand knowledge here.
shadow has answered the first part of your question.
Specifically what are the policies on repayment adjustments of the various banks? I don't know, it's not a question that I get from borrowers and it's not information provided in the product specifications.
One point that you have overlooked is that many people have their wages paid directly into their home loan (referred to as salary crediting) and they draw whatever they need back out to spend, with the specific intent of paying every single spare dollar off their home loan. When rates fall they automatically save more, that is their intent.
Some take that a step further and put all of their day to day expenditure on their credit card and then redraw to clear the card in full once a month to avoid interest on their card. For disciplined savers that works very well. These measures didn't exist years ago, so it's hard to get reliable data on how many people are doing that and how far ahead they are with their repayments.
Any expressed market opinion is my own and is not to be taken as financial advice
wages paid directly into their home loan (referred to as salary crediting) and they draw whatever they need back out to spend
put all of their day to day expenditure on their credit card and then redraw to clear the card in full once a month to avoid interest on their card
That's what I do, and it's pretty common. Most homeowners I know do some variation of this. On the official stats, it will appear like I and everyone else doing this constantly have thousands of dollars racked up our credit cards, but it's fully paid off each month and no interest is ever paid. Good way to make use of the credit card interest free period while letting that money reduce the home loan balance for as long as possible.
That's what I do, and it's pretty common. Most homeowners I know do some variation of this. On the official stats, it will appear like I and everyone else doing this constantly have thousands of dollars racked up our credit cards, but it's fully paid off each month and no interest is ever paid. Good way to make use of the credit card interest free period while letting that money reduce the home loan balance for as long as possible.
Yes it's very common, to the point where banks recognise that by not counting credit card limits in their servicing calculations if you can show them that the cards are cleared in full every month. They want to see the last three months statements to confirm that.
Because variable mortgages are a feature of lending in Australia there may be no comparisons in the USA. We seem to be a little unique.
In fact I am beginning to believe that the speed that our variable mortgages react to interest rate changes and our tendency for using offsets and redraw facilities is what makes our economy exceptional. Knowing that we can redraw extra loan payments is a great encouragement for people to save within their loans. First they get a greater tax free interest reward, and secondly it seems to have made our borrowers more robust.
In the USA the fed reduced rates but existing borrowers got no benefit so it only affected new lending at a time that banks in the USA were not lending. Whereas here the RBA reduced rates and it affected hip pockets just one or two months later, and in many cases accelerated debt reduction, which makes the banking system more robust.
Perhaps our exceptionalism isn't a myth.
Any expressed market opinion is my own and is not to be taken as financial advice
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