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 (9,745 Views)
Great! A big buffer is just what we need for mortgage holders to have when prices drop dramatically and interest rates go up.
Renters and owners will of course not be effected at all.
Any and all costs get passed on eventually.
Ignore posts by The Whole Truth · View Post · End Ignoring The forum fuckwit goes RRRAAARRRGGHHhhh - But not a fuck was given..................by anyone.
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.
I do this to a degree also.
This is one of the things that skews the stats around personal debt. We hear shock! horror! stories about how much people owe on their credit cards, yet people like me run many thousands a month across an interest free credit card and settle it to zero each month paying no interest whatsoever.
It's also worth remembering that while loans from 15 years ago appear easily manageable now, in 15 years time today's loans will be the same. One big difference is that 15 years ago joe and jenny average weren't paying 5% interest! People should be taking advantage of low rates to live simply and pay down principle. Rates probably won't stay this low for more than a few years.
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.
I do this as well but it's more for convenience than saving money. You only really get 1 month's benefit (deferral) from this (so if you rack up $4,000 on the card in a month that would save you 1 month at $4,000 on your mortgage or less than $20 at a 5% interest rate.) Each subsequent month you have to pay off the prior month's credit card bill so you can't get any further benefit. At best you can preserve that (effective) $4,000 early repayment for the life of your mortgage (eg if it takes you another 10 years after you start doing this to pay off your mortgage it would be somewhat less than $2,000 total interest saving).
I also get Amex points on the card which have a small value ($1,000 credit back on the card every year or 2).
“You Keep Using That Word, I Do Not Think It Means What You Think It Means” - Inigo Montoya
Bulls are spot on about credit card usage, recent Commsec analysis shows Aussies using credit cards more frequently, but outstanding debt is at 3-year lows
Quote:
Aussies love using their plastic cards – whether they are credit cards or debit cards. But they aren’t keen on going into debt to make their purchases. The average balance outstanding on credit cards is at 3½ year lows and debt is falling at the fastest annual rate in 19 years of records.
Consumer conservatism continues and there are there no signs of a change in the attitudes of Aussies. The Reserve Bank will be comforted by the on-going trend, and would be more likely to leave rates low for a longer period.
Certainly Aussie shoppers have plenty of ammunition available. The average credit card holder is only using just over 35 per cent of available credit limits. The problem for retailers is that Aussies have actually been using less of their card limits each month, rather than more.
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
Home owners have put up to 90 per cent of the windfall from the past two years of interest rate cuts towards paying off mortgage debt ahead of schedule
Between 50 and 90 per cent of the savings of 2.25 percentage points of official rate cuts since late 2011 have been used for mortgage prepayments
why sectors such as retail have failed to see the bounce from low rates: because people have been using much of the savings to build up ''mortgage buffers''
Let's assume this is the case - it represents a complete turnaround from what has been historically normal. I've never heard of most people having to ask their bank at every rate cut to not pass it on to them as disposable income. My bank certainly passes cuts on automatically without me having to approach them.
Every cut has the newspapers and tv news trumpeting "this will put x amount more in your average borrowers pocket". That's the way it has always been as far as I can remember.
But here we have a situation that even our resident, experienced mortgage broker cannot even tell me is something new or not.
It does seem to make sense as to why it has taken so much cutting for the economy to begin responding - the economy should be red hot at these kinds of rates. Instead, the reaction has been very late in coming and while positive, remains unspectacular.
So if this is something relatively new, it raises a few questions...
(1) Have the major banks seriously compromised the effectiveness of monetary policy as an economic counter-stabalisation tool? One point in our favour during the GFC was that our economy responded much more quickly to drastic interest rate cuts because the savings were passed on directly to all existing borrowers on variable rate mortgages (the majority) while in the US with most mortgages being fixed rate, it was only new borrowing that became cheaper.
(2) For all the talk of "mortgages have never been cheaper" this seems to suggest that most mortgages that are a couple of years old or older effectively cost the same to service as they did before the RBA went on it's cutting drive. If the money is going into paying down debt more rapidly then this is a good thing but from the point of veiw of the average borrower, the bank can cut rates all it likes - they aren't seeing a cent of benefit as far as disposable income goes. As far as how much money they have to spend on consumption goes, they are effectively still paying nearly 8% while the average rate is more like 6%. The effect is as if interest rates have never come down at all.
(3) Following on from (2), if the average borrower is left with only the same amount of disposable income at around 6% as they were at 8% - what happens when rates start to rise? Will the banks feel charitable and not pass on the rises?
(3) Following on from (2), if the average borrower is left with only the same amount of disposable income at around 6% as they were at 8% - what happens when rates start to rise? Will the banks feel charitable and not pass on the rises?
Of course it can (and does) happen if you want to set it up that way.
When interest rates fell from 8% to 6% and they kept the repayments the same, you loan was going down by the difference. When interest rates rise from 6% back to 10%, you can choose to keep the repayments the same and let your loan grow by the difference - up to the agreed limit as determined by the security and serviceability.
Its called a Line of Credit and I have one set up.
Lef-tee
20 Sep 2013, 06:32 PM
(2) For all the talk of "mortgages have never been cheaper" this seems to suggest that most mortgages that are a couple of years old or older effectively cost the same to service as they did before the RBA went on it's cutting drive. If the money is going into paying down debt more rapidly then this is a good thing but from the point of veiw of the average borrower, the bank can cut rates all it likes - they aren't seeing a cent of benefit as far as disposable income goes. As far as how much money they have to spend on consumption goes, they are effectively still paying nearly 8% while the average rate is more like 6%. The effect is as if interest rates have never come down at all.
It doesn't happen that way in the real world. People feel richer, watch their debt get paid off quicker and are tempted to spend more (redraw the the amount they have overpaid into the loan)
This was discussed during the Kevin Rudd $900 handout. If every person who received the handout had a $1000 credit card debt, and they all immediately proceeded to put that $900 into their credit card, one might say there is zero impact on the economy. But in reality, a person who just had their credit card debt reduced from $1000 to $100 is much more likely to spend on their credit card again.
When interest rates fell from 8% to 6% and they kept the repayments the same, you loan was going down by the difference. When interest rates rise from 6% back to 10%, you can choose to keep the repayments the same and let your loan grow by the difference - up to the agreed limit as determined by the security and serviceability.
And I am suggesting that it appears that most people don't actually understand what has been going on - even our resident mortgage broker didn't appear to know.
Are you saying that several million people directly approached their bank and told them to transfer all the savings from falling interest rates into paying off the loan rather than leave them with more disposable income? Peter says that his clients don't even ask him questions like this.
Quote:
It doesn't happen that way in the real world. People feel richer, watch their debt get paid off quicker and are tempted to spend more (redraw the the amount they have overpaid into the loan)
Then I would suggest that you are looking at an alternate real world - because that is precisely what has not been happening these past couple of years, much to the RBA's dismay.
Which leads me to the question that while you and I may operate lines of credit that allow us to draw back on excess payments, such a system only appears to account for a relatively small percentage of borrowers - can you typical person on a standard variable mortgage access excess payments previously made in order to spend the money today?
And if they are as far in advance as being argued here, does that mean the bank will allow them to stop making mortgage payments for the next 20 months if they suddenly find themselves unemployed and cut off from their income stream?
Are you saying that several million people directly approached their bank and told them to transfer all the savings from falling interest rates into paying off the loan rather than leave them with more disposable income? Peter says that his clients don't even ask him questions like this.
Depends on your bank and how you make your payments doesn't it?
For P+I loans payment is almost always paid by salary directly paid into the loan, or probably more commonly by a regular transfer that you actually have to alter - in other words changing the amount you pay into the loan requires a decision and and action and staying the same merely requires inaction. 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.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
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