Mortgage Repayments

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The outgoing RBA Governor thinks more borrowers are actually using the low rates to accelerate their repayments rather than going to Bunnings.
He was asked about household debt and how would QE work in Australia by the Australian Financial Review given the recent overseas experience.
"Well, I'm very much hoping we never need to find out.
"We've certainly observed what has been done elsewhere, and there's any number of assessments around on its effectiveness.
"I'm very thankful not to have been in the position that they were in of feeling that we've got to do more.
"We haven't been in that position, and hopefully we won't be."
He said his test is: "Who went to Bunnings in the end as a result of that?
"Did someone go and take borrowed money and spend it on real goods and services that wasn't going to otherwise?
"Because that's actually in some sense the ultimate test. Did we create some additional demand?"
"It's impossible to know really, but I suppose I'm left with some doubt that all that many people went to Bunnings that weren't otherwise going to."
He was asked to judge the transmission mechanism works in Australia, when you're cutting cash to such low levels?
"I think on the work that I'm aware of, the evidence that I'm aware of, I would say that cash-flow channels still probably work.
"I'm personally of the view that maybe not as strongly as they used to, because I think the evidence is that the borrower households – that's where the action comes from, and the way this is supposed to work is the borrowers have more debt than the savers have deposits.
"That's a fact.
"And when you change rates the borrowers are the ones who are, you know, spending all their income, and if I give them a bit more income.
"They're likely to spend that.
"And the savers – the cut to their direct income is actually not as big, and they're less likely to respond.
"That's still true.
"But I think more of the borrowers are actually using the low rates to accelerate the repayment rather than going to Bunnings.
"Now, what that does is it's accelerating the decline of the debt for those individuals, those households, so the day when they are freer of the debt or have a lower debt and they're then more confident to spend – that day is getting closer.
"But it probably hasn't been as much of an immediate effect maybe as it might once have been.
"And I'm hypothesising here. You can't prove this," he said.
He noted credit growth slowed down in the past year.
"So I think a lot more people are intent on trying to get to the point where they're carrying a lower debt load.
"It's the new people borrowing to come into the market that, you know, keep credit growing at all.
"So I think what's driving that is just people have changed their opinion about how much confidence they have in future asset values rising and how much leverage they're prepared to hold.
"I think a lot of people thought: "I'm going to be more careful."
Glenn Stevens has conceded that he has "some discomfort' about rising Sydney house prices, but argued that these concerns need to be <a href="/expert-insights/57936-housing-markets-not-without-risk-as-sydney-leads-the-charge-rba-s-glenn-stevens" target="_blank">weighed up against the need to stimulate economic activity across the nation</a>.
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Borrowers using low rates for repayments rather than going to Bunnings: RBA's Glenn Stevens

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National Australia Bank Limited has refunded $1.7 million to 966 home loan customers after it failed to properly set up mortgage offset accounts.
Following customer complaints, NAB conducted an internal review which found that between April 2010 and August 2017 it had not linked some offset accounts to broker originated loans.
It resulted in those customers overpaying interest on their home loan.
NAB has refunded affected customers so that they are only charged interest that would have been payable had the mortgage offset account been properly linked from the commencement of the home loan.
'Consumers should be confident that when they sign up for a home loan they are receiving all of the benefits that are being promoted,' Acting ASIC Chair Peter Kell said.
'Where there are errors there should be timely and appropriate action to ensure that consumers are not any worse off as a result of the mistake.'
NAB reported the issue to ASIC. NAB has also engaged PwC to review the remediation approach and to ensure NAB's compliance systems will prevent a similar error from occurring in future.
NAB has commenced contacting and refunding affected customers. Customers who have any questions about their accounts should contact NAB on 1800 152 015.
<h2>Background</h2>
An offset account is a savings or transaction account that is linked to a home loan account. Any money in the offset account reduces the amount of interest payable on the linked home loan. For example, if the outstanding balance on the home loan is $300,000 and there are savings of $50,000 in the offset account, then interest is only payable on the difference ($250,000).
In this case, NAB failed to link some offset accounts to home loan accounts, which meant that money held in those offset accounts did not reduce the interest payable on the home loan accounts. As a result, consumers paid more in interest than was required.
NAB also conducted a broader investigation which found that the issue only applies to broker originated loans.
NAB will also remediate customers who had an offset account during the relevant period but had repaid their home loan before 2017.
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NAB refunds home borrowers after mortgage offset system failure

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Households in Sydney are generally dedicating the largest proportion of their annual incomes to service a mortgage, with the typical household dedicating 49% of their annual income to mortgage repayments, according to a report released last month by AHL Investments (Aussie Home Loans).
Darwin households generally show the lowest proportions of annual income that is dedicated to mortgage repayments, with 22% of annual household income being used to pay down mortgage debt.
Mortgage serviceability rates have improved since 2008, when the average household was dedicating 51% of their annual gross income to servicing a mortgage.
Mortgage serviceability data extends back to 2001 when the typical household was dedicating a much smaller proportion of their household income to service a mortgage, the Aussie report noted.
In 2001, households were dedicating an average of 26% of their gross annual income to mortgage repayments.
<img src="https://www.urban.com.au/images/2018/7/6/Aussie%20Graph%204-2.JPG" alt="">
As housing values and interest rates moved higher, serviceability became more challenging, with the average proportion of household income required to service a mortgage reaching a peak of 51% in June 2008.
Despite dwelling values generally moving higher over the most recent five year period, mortgage serviceability has held reasonably firm thanks to mortgage rates trending lower.
Of course, as households reduce their principal loan amount, serviceability will improve.
With so much variance in the value of dwellings across the regions of Australia, mortgage serviceability measures show a broad range across the cities.
<img src="https://www.urban.com.au/images/2018/7/6/Aussie%20Graph%204-1.JPG" alt="">
 
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Sydney trumps all in mortgage servicability hurdles over the past 25 years: Aussie/Corelogic

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Thousands of Australian mortgage holders are likely ‘trapped’ with their current lender, due to tighter lending restrictions, the comparison site Mozo has found.
It leaves them unable to negotiate or refinance their home loans. 
“A mortgage prisoner is a homeowner who is unable to move to a more competitive mortgage deal, even if they’ve met every repayment, because they would not pass new affordability tests applied by the banks,” says Steve Jovcevski, Mozo property expert.
"Typically, this is because they took out the loan before stricter lending rules applied. 
“Stricter lending criteria was introduced for good reason, with skyrocketing household debt, poor income growth and historically low interest rates. 
"The flow on effect is 30% of owner occupier borrowers are now finding themselves facing mortgage stress – and many are also falling into the mortgage prisoner’ category.
"The sad reality is borrowers who need competitive mortgage rates to stay financially afloat are most likely to be mortgage prisoners.”
He noted there had been generous lending standards in the past, that was now up against rising cost of living and stagnant wages.
"With an increase in interest rates likely to grow over the next few years this group is predicted to grow, meaning a large group of banking customers will be effectively 'stuck' with their bank. 
“When a customer is essentially tied to a provider, they are at the mercy of whatever rate rise or conditions the bank chooses to impose,” says Jovcevski who gave an example of how  mortgage prisoner arose.
He nominated a couple with one dependent and a dual income of $120,000 who purchase a home in 2013, borrowing a total of $800,000.
Their monthly repayments are $4,295 which leaves them $3,680 to manage their other expenses.
Fast forward five years, the couple now has a combined salary of $129,000 and they've had another child.
They're still paying the same amount each month, have $734,600 left to pay off, and would like to refinance to another bank that’s offering a rate of 3.8% rather than staying with their current uncompetitive home loan rate of 5%.
When they first applied for their loan the bank used a poverty line index to estimate their costs ($3,276 per month) with a buffer of 1.5% to ensure the couple could meet their repayments if rates increase.
The bank now uses their actual monthly expenses which they’ve assessed as being $4000 per month, and applies a 2% buffer to safeguard themselves against rate rises.
With the new criteria the couple could only borrow $680,000, so do not have the ability to refinance their loan, leaving them at the mercy of any rate hikes from their bank. 
"If this family was able to refinance to a competitive rate of 3.8%, they could potentially save $149,272 over the course of their loan.
"Due to the loan assessment changes they are unable to refinance to their desired lender,” says Jovcevski noting the banks used to assess potential homebuyers seeking a loan using a ‘house expenditure measure’.
It now looks at the applicant's income and annual expenses - this is everything from utility bills to Netflix subscriptions to monthly beauty treatments.
"Previously, a ‘one size fits all’ approach was applied, with modest expen ses estimated regardless of income, resulting in inflated amounts being lent to hopeful homebuyers." 
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Mortgage Repayments

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