It seems that Australian homebuyers are heeding the advice that has been handed out by banks and financial advisors. That is, to keep paying the same repayment amounts even if interest rates drop.
The Reserve Bank of Australia (RBA) still has concerns over the amount of household debt in Australia; there is some surprising data about the rate of home loan repayments.
Peter Mozo, Data Head at Mozo said, “Data from the Australian Bureau of Statistics found the refinancing slowed during 2009 but, it has been building back towards a peak.
So, even as the value of property is falling or, stagnating, debt remains high for those who bought into the market when housing was more expensive. Yet, recent research from the RBA has found that more and more borrowers are paying more than the minimum repayments required to their home loans.
Whether this is due to economic uncertainty and job insecurities isn’t known. But, it is fair to assume that the old saying ‘make hay while the sun shines’ is making sense for those who do not have job security. These people are continuing to make payments that were established when interest rates were higher, rather the decreasing the minimum repayments and pocketing the rest.
If a bonus is earned, it is deposited into the home loan rather than spending it, using it to fund renovations or, investing in something else. This has meant that up to 30 per cent of those ahead in their repayments have a buffer of two years. This means, that if things were to take a turn for the worse financially, the household would have up to two years to recover before that surplus was eroded and further repayments would need to be made.
“Over the last four years, people who have had their mortgage for 10 or more years tend to have more equity in their home loans than previously,” said Steve Jovcevski, Home Loan Expert at Mozo.
Home ownership remains key of financial success
Further research from Nielsen found that 68 per cent of home borrowers stated their financial goal was to pay off their home.
Some industry experts are concerned that sinking all available ‘extra’ cash into a home loan does not promote a balance financial plan, many Australians view outright home ownership to be a critical measure of their financial success.
In the same Nielsen survey, on 13 per cent of home borrowers said their top goal was to save for retirement. This means, that adding additional cash into superannuation is taking a back seat over paying off the family home.
There is concern that this will create a generation that is asset rich but, cash poor when it comes to retiring age.
This is despite a home not being able to generate any income in retirement apart from when it is sold, meaning future retirees could find themselves debt-free but cash poor.
Overall, this trend to be ahead in home loan repayments is further indication that Australia was developing a culture towards saving, rather than borrowing. The Deputy Governor of the RBA, Philip Lowe said, “The rate of savings in Australia has increased and is back to the level it was in mid 1980s.”
Refinancing to pay off a home loan sooner
There has been a trend in the refinancing of home loans in the wake of the rate deceases. In the mid 2000s, borrowers who had over extended often sought refinancing to lower interest rates in order to meet repayments.
Now, borrowers are refinancing to access the lower interest rates, but are making repayments over and above the minimum. If the household had budgeted for a higher repayment when interest rates are high, they are continuing to make repayments at that rate.