Australians focused on paying off home loans, not retirement savings, while banks earns billions more in interest payments
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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.
The Mark at Sydney's Central Park
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Those who take the time to do some research before tossing a few hundred thousand at an investment property tend to focus on demand, with scant regard for the flipside of the growth equation.