The message being pushed by mortgage brokers and consumer advocates that borrowers should maintain their current mortgage repayments when interest rates fall and pay off their home loans sooner has well and truly been absorbed by home owners.
Nearly seven out of 10 mortgage holders (68%) surveyed by Nielsen said their number one financial goal was to pay off their home loans, confirming the view that Australians regard owning their home outright as key for their financial future.
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.
In a Property Observer webinar on property and wealth-creation, WHK financial adviser Peter Handberg advised investors against investing extra income in paying off their mortgages but to consider putting the money into a balanced income-generating retirement portfolio made up of a mix of shares, property, bonds and cash.
“You can’t sell a bedroom,” says Handberg.
Only 13% of the 500 borrowers surveyed by Nielsen said their top goal was to save for retirement, while just 8% said purchasing an investment property was their number one goal, confirming the savings culture in Australia highlighted in a recent speech by RBA deputy governor Philip Lowe.
The Nielsen study was commissioned by mortgage lender Crown Lending, with chief executive Scott Parry saying results show that the overwhelming majority of Australians wanted to live debt-free.
The propensity for borrowers to make extra mortgage repayments and reduce their home loans comes as banks earn billions more by not passing on interest rate cuts in full.
Following last week’s 25-basis-point rate cut by the RBA, all the major banks and their subsidiaries passed on 20 basis points, increasing their interest margin buffer by a further five basis points.
Notwithstanding the propensity of making prepayments, Mark Lewis, chairman of Adelaide mortgage broker Bernie Lewis, says that in the last five years borrowers have paid $18 billion extra in interest on their home loans due to banks not passing on the RBA interest rate cuts in full.
The banks say higher funding costs and a need for them to raise more expensive funding from retail deposits mean they cannot afford to pass on rate cuts in full anymore.
Lewis says while he agrees “on a grassroots level” that banks are not obliged to move in lockstep with the RBA, he does not buy their funding excuses, which he calls a “bitter pill” for borrowers to swallow as banks continue to generate record profits.
“The gap between the Reserve Bank cash rate and the average standard variable interest rate of the four major banks has nearly doubled since 2007 [from 1.8 percentage points in 2007 to roughly 3.4 percentage points currently],” he says.
According to Ratecity.com.au, the average standard variable rate across the lenders on its panel in November was 6.62% compared with a cash rate of 3.25% – a difference of 3.37 percentage points.
Assuming that lenders pass on 20 basis points on average – the average standard variable rate would reduce to 6.42% with the cash rate at 3% – a difference of 3.42 percentage points.
Lewis says that despite the RBA’s “emergency” cash rate setting, the increased margins of the banks means the cash rate would need to fall to 2% to have any impact – a fact acknowledged by Philip Lowe, when he said in the same recent speech, that the cash rate was currently 1.5 percentage points lower than it would otherwise be due to bank mortgage rates no longer moving “in near lock step with the cash rate”.
Despite their being better deals on offer through alternative lenders, Lewis says many borrowers appear apathetic to the fact that they are paying more than the need to on their home loan while banks are more than happy to take the extra cash and add it to their bottom line profits.
“You could argue that they have the right to increase, but the other thing that comes into play is the lack of competition in the market. With reduced competition comes lazy banks and a growth in margin,” Lewis says.
Banks have also been gouging extra interest payments from borrowers by the length of time they are taking to pass on rate cuts.
ANZ and Westpac combined are expected to generate more than $53 million in interest by being the last of the big four to pass on the RBA’s cash rate cut, with economists estimating that the major banks earn around $2 million for each day they withhold passing on the rate cut, according to Australian Broker online.
Westpac will pass on 20 basis points on December 17 – a full 13 days after the RBA announced its rate cut, while ANZ borrowers must wait until Friday to hear how much it will pass on as part of its independent rate review with borrowers likely to have to wait at least a week further for any rate cut to take effect (December 21).
The Commonwealth Bank and NAB passed on their 20 basis point rate cuts on December 10, earning an extra $14 million each by delaying the rate cut reaching borrowers.
Yellow Brick Road’s rate took effect on December 10, but ING Direct borrowers must wait until Christmas Eve (21 days after the RBA decision) to benefit from lower repayments.