Hockey deleveraging

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Talking to the ABC this morning, incoming Treasurer Jo Hockey said:

“I, like others, have taken advantage of the lower interest rates to try to pay down the principal. But I know, like everyone else, that that’s just a temporary feature.”

Well, Joe, if you continue to pay your mortgage ahead of schedule it won’t be temporary at all. Ironically, Hockey went on to recommit to a new “Son of Wallis” banking inquiry that would aim to keep banks “profitable and safe” but:

“You need to change a whole lot of infrastructure in financial services to encourage competition in lending and we need more overseas banks active in the Australian market.”

Change of lot of infrastructure to increase competition, eh. I would like to be pleased but I’m worried instead. I wonder, if he succeeds, whether Joe plans to lead from the front and expand his loan?

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Hmmm, lots of competition lots of hungry banks all keen to find customers thirsty for quality debt products.

    The RBA and the spruikers for the Merchants of Debt love to bang on about how well behaved inflation allowed lower interest rates and, as night follow day, this makes a new higher plateau of debt as natural as motherhood.

    The problem is that we are now on that plateau and judging from the RBA decisions on interest rates there are risks of subsidence and landslides.

    So does Mr Hockey have a new higher plateau in mind that this larger ‘hard competing’ …cough cough… festival of debt peddlers will help us acheive?

    The world is a different place Joe.

    The air bed is now fully inflated – try and jump on the foot pump and after some initial joy you might go BANG !

  2. He also called on Swanny to have a word to other countries about devaluing their currencies and hurting us.

    No,really.

    • Are you insinuating that world leaders would ignore advice from the World’s Greatest Treasurer?

      Ha! You jest good sir! 😀

    • Or just couldn’t afford a house worth that much and stretched too far with no buffer for unemployment, sickness, reduced hours, no payrise, no promotion, no help from mum & dad?

  3. Admittedly I haven’t done much asking around but anecdotally, I don’t know of anyone who has committed to making additional repayments on their mortgage.

    Anyone think of any situation that might lead to loans being paid down faster automatically rather than voluntarily?

    • Ive kept my mortgage payment fixed as the interest rate has fallen: its getting paid off faster automatically.

      (actually we voluntarily increase our mortgage payment each six months or so by another $50 a week or so, don’t miss it but has compound effect)

      • Why are you paying it off, Chris! Haven’t you figured out yet… that debt is good….the more the better…it’s your patriotic duty to assume as much as you can; enough to make your eyes water! For heavens sake. If Australians like you; in your privileged position of having spare capital to apply don’t do the right thing, who can we expect to!

        • Always pay off non-deductible debt as fast as you can, start with credit cards.

          The before tax cost of a non-deductible credit card debt, personal loan or home loan make them the natural target for savings and investment.

          Use a spreadsheet to see how many dollars you have to earn and pay tax on at marginal rates to pay non-deductible interest on a credit card and home loan, then compare how much you have to earn to pay the interest on a deductible loan for an investment property, to fund shares etc. Do the calculations at your marginal tax rate and include all levies eg medicare levy if you don’t have health insurance.

          If you are nerdy, work out how much capital gains tax that would offset, or would you be better off using the higher income to buy a more expensive house, paying more non-deductible interest but not having any capital gains tax to pay.

          If you want to, substitute deductible debt rather than savings as the funding for your investments and use the savings to pay down the non-deductible debt as fast as possible, particularly if you have redrawing rights.

          The very cautious might want to have buffer savings in a bank different from the one that has their loans so the lenders can’t control your liquidity or offset savings against loans in a bad case scenario.

          This is not investment advice, just someone telling you to be analytical and do the numbers for yourself based on your own situation.

      • I was actually thinking of something I thought I read at the (loonie bin asylum forum) some time ago but the recollection is a little vague – something to the effect of investment property loans on a variable rate continue to charge the same amount as the original interest rate when the loan was taken out, even as the variable rate falls – but the difference between the old and new rates comes off the loan.

        I don’t know if this correct at all and I’m not sure who posted it.

  4. “… we need more overseas banks active in the Australian market.” Haven’t we been around this buoy before, say the 80’s! And what happened? A couple of banks like Barclays and Citi, tried to open branch networks, and failed, and the rest of the new entrant went on a lend-our-way-to-profit binge. Take the BNZ, for instance. Eventually broke, and that nearly took our country with it, as a result of Aussie lending. Then sold to the NAB for a dollar. And back we went to The Pillars. That’s the true size of the Aussie banking marketplace. Recognise it, and control the Pillars accordingly.

  5. That only works if you have a current and consistent reasonably paid job.

    With the increasing casualisation of the workforce – it is inapplicable to many.

    There debt service remains unchanged – as much as they would wish to end their debt more quickly so they can achieve other needs beyond shelter.

    Unfortunately both the government and opposition intend to continue on the current path providing no help to others.

    Thus failing to fulfil a basic public purpose – safe shelter for all (notwithstanding a homelessness issue as well).

  6. “Talking to the ABC this morning, incoming Treasurer Jo Hockey said:”

    Incoming Treasurer? couldn’t we at least pretend there was a choice?

  7. Tassie TomMEMBER

    Hi incoming treasurer Joe Hockey,

    I hope that the infrastructure that you’re talking about is portable bank account numbers!

    Now, THAT would increase competition.

  8. Keen quashed this neo-liberal nonsense 3 years ago. Banks compete by lending- lending which leads to instability and Australia has a record on this the last time foreign banks were intended to spur competition.

    Next treasurer? – Australia – the new Cyprus.

  9. All I want to see from Hockey and Abbott are written promises to leave the tax free threshold at the new $18 thousand level, not increase rates for those on under $80,000 taxable income, not increase the total take from the GST by more than CPI and leave tax on Super alone for those with less than $1M and less than $100k per annum withdrawal/pension.

    To see that the rich are winning the class war they have silently waged, just look at a chart of tax rates over the years and convert it to how many dollars are no longer paid at verious income levels and look at Australia’s Gini moving away from egalitarianism after taxes and transfer payments are considered.

  10. Crocodile Chuck

    Has Hockey had the gastric lap band surgery? He looks one hundred fifty pounds lighter.