Mortgages: The truth about households paying ahead

By Martin North, cross-posted from the Digital Finance Analytics Blog:

One of the arguments often used to disprove any issues in the housing market is the fact that some households are paying well ahead of required repayments. For example in the recent RBA Bank Stability Report, they say “Outside of investor housing, household sector finances are currently less cause for concern. Household credit growth has remained moderate, because new lending for purposes other than investor housing has been more subdued and because existing borrowers are taking advantage of low interest rates to pay down debt more quickly than contractually required. The aggregate mortgage buffer – as measured by balances in offset and redraw facilities – has risen to almost 16  per cent of outstanding loan balances (more than two years’ worth of scheduled repayments at current interest rates). “RBAPayDownMar2015“More broadly, households continue to save a greater share of their income than in the decade or so prior to the financial crisis. Households’ ability to meet interest payments on their loans is being aided by the low level of interest rates. However, while the debt-to-income ratio has been relatively stable over the past decade or so, especially once balances in offset accounts are netted off, it is high relative to its longer-run history.”

RBAHouseholdsMar2015However, DFA is not sure that the aggregate data as cited really shows the true state of play? Not all loans have redraw and offset facilities. When interest rates fall are repayments automatically adjusted? So which households are paying ahead? How far ahead are they? To answer these questions we used data from our market model and today outline some of the key findings. The net result shows that whilst some households are ahead, and some well ahead,  it is concentrated in specific parts of the mortgage book. It should be said, it is a predominately owner occupied mortgage phenomenon. Within in the DFA segments, the bulk of households who are ahead are classified as holders. These are households with no plans to switch properties or refinance. Many have left monthly repayments at levels aligned with higher rates, and have allowed repayments to run on at higher than needed to meet current repayments. A significant proportion of these households have redraw facilities, meaning they could lift their borrowing if the wanted to.

Forward-Payments-By-HouseholdLooking at the age of the primary household member, we see there are periods when households are more able to repay ahead. Late twenties, when children have yet to arrive, or later thirties when both parents are more able to work and so lift income. We see a fall off in later life.

Payment-Ahead-By-AgeThe value of the property itself is not a very good predictor of whether a household will be paying ahead, though we see a greater distribution at lower property values.

PayAheadValueMar2015Households with smaller outstanding balances are significantly more likely to be paying ahead, compared with larger loan balances.

Paid-Ahead-Value-Mar-2015Households with a high LVR (Loan to Value Ratio) are much less likely to forward pay.


Some occupations are more likely to be ahead, including those working in the agribusiness sector, office and administration and sales.Those in mining, and legal professions and social sciences are least likely to be ahead.

Pay-Ahead-By-OccupationThe geographic footprint is interesting, with households in the Melbourne region the most likely to be paying ahead, then Brisbane, whilst a lower relative proportion in located in the Sydney region. Households in WA are less likely to be paying ahead, whilst relatively, those in Canberra are more likely to be paying above the minimum.

Forward-Payments-By-RegionsThe top 10 pay ahead post codes in NSW are Dubbo, Naremburn, Greystanes, Baulkham Hills, Earlwood, Leumeah, Woollahra, Cronulla, Narrabeen, and Castle Hill. In VIC, Cranbourne, Tarneit, Derrimut, Wheelers Hill, Northcote, Malvern, Langwarrin, Kennington, Bundoora and Greensborough. In QLD Mount Pleasant, Harristown, Caboolture, Benowa, Basin Pocket, Millbank, Buderim, Geebung, Coral Sea, and Brighton. In WA Tapping, Canning Vale, Success, Currambine, Wonthella, South Perth, Morley, Huntingdale, Midland and Lamington.

At current interest rate levels, the average coverage is about eleven months, though some have even more in the bank.

Paid-Ahead-Months  So, the conclusion is that the households who are paying ahead have smaller mortgages, lower LVRs live in more established suburbs and are under less financial pressure. However, do not be deceived, there are significant numbers of household with high LVRs and LTI’s and no hope of paying forward. We showed that in our previous post. You cannot make a compelling case for saying the housing sector is fine on the back of paying ahead data. It is too myopic.


  1. it only takes small percentage of people who are willing or forced to sell for much less to make price collapse because buyers are not so willing to buy in falling market even if buy seems to be a good deal.

    • buyers are not so willing to buy in falling market even if buy seems to be a good deal.

      Indeed. Thanks Martin. If you have any data on the “myth” of hordes of “house horny” FHB sitting on the sideline, it would be instruct as well.

    • Exactly, everyone wants to be seen as the savy investor buying property on the way up. But no one wants to be seen as the fool who tried to catch the falling knife.

      “why did you buy that property, everyone could see prices were still going lower”….

      The worst thing an Aussie wants is to be known as a loser at the family BBQ.

  2. Excellent research. 11 months pay ahead is nothing if there is a rise in long term unemployment.

  3. It seems pretty misleading to call an offset or payment ahead on a loan saving.

    The truth is nobody is saving until they have actually paid off the house, until then they just have less debt which is meaningless if the asset value declines.

    This is unfortunately why we are so sensitive to housing prices – our very language implies they can never decline in value.

    • +1 Superb stuff!!

      now all we need is some spurious speciousness from some affiliated entity in the RE lobby to explain why there is no problem at all and to let us know what the data isnt catching……..I feel sure there will be one

      • Your wish is my command gunna.

        I like the DFA analysis actually, but a couple of points.

        1. Households are saving what the government budget deficit allows them to save, if we see a surplus then the savings will cease.

        2. All variable loans have a redraw and/or an offset – almost no exceptions. Almost without exception every loan that I see is in advance of repayments.

        Until we see unemployment and higher interest rates households will continue to pay more and more debt down, based on the assumption that Tony will never had a budget in surplus.

        Sorry Lindsay David, no crash today.

  4. Distribution of forward payment by age looks interesting, especially the dip at age 40.

    Is that the age when investas start loading up on IPs?

    Great research, many thanks!

    • coolnik, I reckon it possible dips at 40 because that would be close to the median age for divorce.

      This data set from Martin is excellent and shows the inherent problems with viewing the market in aggregate terms.

      The RBNZ has started to look at household debt in cohorts which is necessitated by their macro pro policy aimed at high (80%+) LVRs. Ironically the RBA/APRA are using aggregate data to justify not employing macro pru.

      It would also be fascinating to see how far ahead “investor” loans are given they tend to be very high LVR interest-only products that seek to maximise interest in order to attract higher NG deductions.

      Looking at the MB posts just over the last week or so it also looks like commercial property, particularly in Sydney, has drifted away from all grundnorms.

  5. That is a particularly impressive analysis and synthesis. This guy is good enough to be blogging for MB.

  6. mine-otour in a china shop

    This is superb analysis and a real proper go at deciphering the offset issue.

    The RBA see everything at the macro level. This analysis make an attempt at deeper thinking across various cohorts and differing positions.

    Well done – RBA and APRA boffins take note of how to do deeper analysis.

  7. DFA info a great asset to the ‘no nonsense’ MB.

    Note: Down my way, this is the street logic: ” Why pay more, mate? She’ll appreciate whether its paid for or not.”

  8. This might be backwards: “Households with smaller outstanding balances are significantly more likely to be paying ahead, compared with larger loan balances.”

    It seems likely to be the case that it is the households that are paying ahead are likely to, consequently, have lower loan balances.

      • It certainly isn’t any FHB in Sydney’s inner west who bought in the last few years. I can’t imagine the monthly repayments for them, what a mess it’s going to be.

  9. Brilliant work from Martin and his team. I hope he gets the recognition that deserves in the future for pointing this stuff out.

  10. Distributions, distributions, distributions…

    It is a critical part of any good data interpretation, but is daly often lacking in much economic and financial analysis.

    Even in my short-lived days as a humble econo-blogger and running The BurbWatch Project website I was further convicted on just how important it was to interpret aggregated metrics (medians, averages, etc) in light of their data distributions.

    Martin, if you’re reading this, your work in this regard is fantastic and valuable – thankyou for sharing it.


  11. Martin – how do we determine to what degree a household with a redraw facility is actually ahead by? On most days you could choose to survey me, my household would appear to be a very long way in advance. However, take the same survey a couple of days before payday and it would be a different story. We are always in advance for real but the reality is that the vast majority of money sitting in that account will be drawn down for daily living expenses.

    How do you seperate it out?