Aussies are taking out and repaying mortgages at a record pace

Record low interest rates and households awash with stimulus money is having interesting effects on Australian borrowing habits.

On the one hand, Aussies are taking advantage of the lowest borrowing rates on record to pile into the housing market, with new mortgage issuance running at all-time high levels in January, according to the Australian Bureau of Statistics (ABS):

Australian mortgage commitments

New mortgage commitments are running at a record high, driven by owner-occupiers.

At the same time, growth in the stock of mortgages outstanding was running just above record lows in January 2021, suggesting Australians with existing mortgages are also taking advantage of low interest rates to repay debt at a record pace:

Australian long-run mortgage growth

Mortgage growth remains near record lows as existing mortgage holders furiously repay debt.

The upshot is that while Australians are undoubtedly taking-out mortgages at a record pace, the value of these new loans is being mostly offset by existing mortgage holders repaying their debts at a similarly frenzied pace. Accordingly, outstanding Australian mortgage debt is barely increasing.

Interestingly, cashed-up Australians are also shunning personal consumer loans.

As shown in the next chart, new personal finance commitments are running at their lowest level on record, according to the ABS, tracking at roughly half the level of the late-2010 peak:

Australian personal finance commitments

Annual personal finance commitments hit a fresh all-time low in January 2021.

The Reserve Bank of Australia’s (RBA) personal finance growth data – which captures new loan commitments and repayments – also shows that the stock of personal loan commitments fell by 12.4% in the year to January 2021 – a decline that dwarfs the troughs experienced during the early-1990s recession (-6.0%) and Global Financial Crisis (-7.8%):

Australian personal credit growth

The stock of personal finance commitments outstanding fell by 12.4% in the year to January 2021 – close to the biggest decline on record.

The key takeaway is that record low mortgage rates and the property boom do not necessarily mean that Australian household debt will rise.

If the flood of new mortgages is offset by repayments and ongoing declines in personal debts, then the stock of outstanding household debt could remain stable or even fall relative to incomes or GDP.

This might help to explain why the RBA is currently sanguine on the property boom as it doesn’t yet point to financial instability.

Unconventional Economist
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Comments

  1. migtronixMEMBER

    I’m sorry, why would you payback faster at a cheaper price? “you can pay me $1 now and every day for a year or you can pay me $400 now, BTW it might be 50c in 6 months 😜

    • happy valleyMEMBER

      Because they’re going to use the new equity mate to go and get a mega mortgage to become a reusa IP specufestor?

    • Cynical snake

      Usually they pay back the same, but lower interest means that is faster.
      Rarely do people reduce their payments on falling interest rates.

      • drsmithyMEMBER

        Usually they pay back the same, but lower interest means that is faster.
        Rarely do people reduce their payments on falling interest rates.

        In my experience the bank typically adjusts the payment along with an interest rate change.

        I would be surprised if a substantial percentage of people “paid” more than the minimum amount of their mortgage, though I imagine most these days take advantage of either an offset or redraw to dump all the income in and minimise interest charges.

        It’s kind of splitting hairs, I know, but all those things have different outcomes.

        • PlanetraderMEMBER

          It may be that the use of offset accounts impacts this – i.e. people keep making same payment to offset account?

          • drsmithyMEMBER

            Typical strategy is to dump your (and your partner’s, if there is one) income into the offset account, then the bank takes (typically minimum) mortgage payments from that account.

            A common alternative is to dump incomes into the mortgage account itself, then use the redraw facility once a month for a cash drop and credit card payments. This one is technically riskier but most people don’t care (or don’t understand).

            They have similar effects in the moment, but potentially very different outcomes over a longer period of time.

  2. elasticMEMBER

    As IRs get lower, all existing borrowers can pay off their loan much faster if they continue paying the same monthly amount. And there are alot more existing borrowers than new borrowers. Back of the envelope calculations, 2.1T total mortgage debt, growing at 3.6% is about 75B a year. New borrowings growing at approx 36B a month which is over 400B a year so well over 300B is being paid off annually. If new borrowings fall below 30B a month then you could be looking at zero credit growth. No wonder the RBA is trying to pump the housing market with new big loans and the LNP have their back.
    If the feds print too much new money and the plebs get set on paying down debt then the problem gets amplified. It is also not helped by a much larger portion of the loans being repaid is now principal with rates so low even early in the loan. Mathematics says that eventually an equilibrium will be reached where loan repayments will equal new loan creation and this point has to be close now that IRs are close to rock bottom.
    It will be interesting to see how long this FHB frenzy lasts and if investors do step in to the breach.

    • And/or refi with shorter loan terms. You can knock 5 years off pretty easily and keep repayments the same.

    • Jumping jack flash

      This.

      Nice calcs. The debt must grow though, and at the correct rate. For the debt to become self sustaining we need the trio of debt growth, CPI growth, and wages growth. All 3 are linked.

      We have actively suppressed CPI and wages growth over the past 10 years or more and as a result the debt growth is also suppressed.

      Dont forget that the economy was in a death spiral as a result and everything was in shambles by the end of 2019. Thankfully we got another chance from COVID-justified stimulus. If our leaders are not stupid they would seize this opportunity to return to self-sustaining debt growth.

      Things are looking good but we need some CPI first and then some wages growth to spur on some decent debt growth.

  3. adelaide_economistMEMBER

    I’m not sure how ‘common’ I am but I took out a circa $500k mortgage but had almost half that to put straight into the offset account from day one of the loan. So on the stats there’s an explosion of debt but in net terms nowhere near as great as it appears. If I wasn’t intent on paying off the loan quickly then it would barely touch my consumption patterns.

    For what it’s worth, the two recent purchases other than mine I am relatively intimately aware of, the offers were completely unconditional on bank finance yet were well above what was considered the generous offer level. There’s a lot of cash out there apparently.

    Also the only thing my bank said to me was ‘no apartments’ and I’m aware of a relatively high income earner denied a loan despite big equity in a Sydney property so they (for now at least) have some standards. It does make me think this house craze has some real legs left in it yet.

    • Yeah I’ll be doing something very similar with my tiddly little mortgage. I’ll put 9K which is 3 years of repayments into the offset account and keep it there. I haven’t yet figured out what my ideal repayment time line is but its well under the terms of the mortgage (which is why it’s variable). I need to live in the place for a bit to figure what I’ll do to improve it (solar/battery, double glazed windows?) but I basically only got the mortgage to have some spending money. So I’ve followed Janet’s advice to get debt, but I have not loaded myself up. If interest rates go up then that’s my motivation to clear it faster

      • Diogenes the CynicMEMBER

        That is sensible Popcod. Aside from improvements you will occasionally have to fork out for maintenance so it is worth having a reserve. Solar without battery is a positive investment with a short payback period. With battery the return is longer but it has some other benefits if your area occasionally has blackouts (mine can keep the fridge/freezer and internet going in a blackout). For a cold state double glazing makes a lot of sense, I live in WA so it makes less sense but have still considered them.

        • I can’t believe that I can do this all with as little financial stress as I am (I am so fortunate the purchase price is significantly lower than I thought possible). There are grants for both panels and batteries in Vic atm, so I think I’ll take advantage of that at some stage soon, but I haven’t done any research just yet. I aim to have an EV once there is some choice in the market and prices go down, so I do want a battery (I have no idea if the area gets regular blackouts). Anyway the EV is something to save up for. Luckily the house has been extremely well maintained throughout it’s life and the building inspector said the quality was above average for it’s type so hopefully I won’t have to pay out on big maintenance items, but if I have to, I can. As it is double Mt Gambier stone I’m pretty sure there is no wall insulation so I am thinking the double glazed windows will just help with heating at least and to a small extent with cooling. My parents had double glazed windows put in on their mid 80s early modern box style home (ie a glorified tent the windows are so large) and the difference to performance of the house in both winter and summer is phenomenal. Of course the insulation is [email protected] but I reckon the house is at least 5 degrees warmer in winter and on hot days it is 10 degrees cooler. It was the best 60K they have spent on the place believe me. The improvement in keeping the house from getting too hot in summer was a real surprise to us all. I honestly would recommend double glazed windows to almost anyone except if they were in the tropics (though the window size is something to consider, we had no idea so much heat was coming in through the glass even when the sun wasn’t directly on the glass).

          • I wouldn’t hold your breath for cheaper EV’s. They’ve been going to be cheaper in a year or two for quite a few years now with no real drop in prices to be seen.

      • adelaide_economistMEMBER

        I was impressed with how you managed to get that house (from what you said on other posts) and I wish I was as conservatively geared as you are. But yes, I don’t know if us MB types are just outliers or not but few recent buyers on here seem to have put themselves in a silly position. We all recognise the craziness of this but we seem to be way past the days when policy was predictable and none of us are getting younger unfortunately.

        • Yeah I’ve also been really happy that most MB recent buyers have managed to purchase relatively ‘conservatively’ compared to the current Australian norm. I think we ended up at MB at various stages in our economic and financial self-education process. I’ve got the added challenges of being a single middle aged female and having a pesky invisible disability (and I have no idea how much longer I’ll be able to work for and if I can’t work I doubt I’d ever get any gov support) so the incentive for me to do this in a way that does not risk my eventual financial independence was bigger than most people. I already know I’ll probably only ever be a low income earner so relying on income earned though labour to pay off a ‘normal’ mortgage is a fools game for me. I did get an advance on my inheritance that has a repayment condition but I could have paid for the whole purchase if I liquidated everything I owned. This way though, I actually have the chance to keep some investments, not have to work to such a degree that I risk my health deteriorating AND hopefully I can finagle those investments into a modest level of wealth so that I could get by on 10-15 hours of work a week or less. So now that I have the house goal #1 is paying it off while working towards goal #2 of being independently financially comfortable enough I don’t have to work if I don’t want to.

          And yeah the policy world is crazy and only going to get worse so when I saw a chance I took it. Now I need to take breath and try and figure out the best way forward with investments and how to protect myself if we do get even more inflation than we currently have. I had to sell most of my gold to get the house so I think the first step might be figuring out how much ‘insurance policy’ gold I need now that I’ve got a home. Good luck on this next step for you in life!

    • Similar situation with us as well. We took out a mortgage @$570K and had $90K in the offset from day one. Our savings rate remains unchanged as repayments are only a smidge more than what we were paying in rent so we’ve had no change in consumption patterns.

      Our plan is to build it up to at least one year’s income in the offset as an emergency fund and put anything extra into the mortgage and investments. If interest rates rise, then we will pay off a good chunk of the mortgage with some of the spare cash.

      • adelaide_economistMEMBER

        Yep I’m definitely prepared for interest rate rises because who thinks anything goes to plan, certainly these days. We are definitely in strange times and frankly the idea of keeping all my money in a bank and zero debt was just as scary as taking on a big mortgage. I know some on here think ‘sound money’ is just around the corner but the last thirty years of economic policy and our current social climate doesn’t support that notion in my mind. I’m just trying to do the best I can where there are no good options and if I’ve chosen wrong then that’s how it is.

    • Adelaide_economist,
      that 250 large is earning 2% odd interest rate. Dont you think you will get better rates outside?

      • adelaide_economistMEMBER

        I considered dumping it in a spread of stonks, precious metals and heaven forbid even leaving some in cash but I feel like everything is overbought at the moment (and yes, including housing). I’m pretty conservative with my money (it’s all post tax income earnings, no equity gains for me) so it made it hard to spend at all. What I was doing was spending a lot on rent though so I felt this was a way to try and lock down an essential service in a way that other investments can’t guarantee if their value also drops. I figure though the offset account makes it easier to dump some of that into other opportunities if they become compelling.

  4. MathiasMEMBER

    So basically, the longer we wait this one out, the easier its all going to be 🙂

  5. Yeah but this is what happens when the size of debt increases. The denominator is so large now that the actual $$ amount needs to be much larger to make a dent %% increase wise.
    If you had looked at the amounts though i bet they are massive amounts now than previously, just that the existing mortgages provide a huge inertia for growth.

  6. I cannot believe these innocent FHB, are rushing to take on the debt they are at these absurd unsustainable low interest rates.
    The only reason things have boomed is borrowed money by government and people going nuts borrowing
    As we head next few years AUST GOV bond rates will be much much higher and home loan rates
    It’s going to be a very tough decade for many

    On top as we head into the greatest financial crisis in history, maybe 5 or 10x the GFC, unemployment for a period later in the year might touch 30%
    This should have been knocked on the head many years ago
    They will probably have to do some debt forgiveness, very interesting times ahead
    Do we have leaders that can deal with what’s coming? I’m not sure

    • Cynical snake

      “They will probably have to do some debt forgiveness, very interesting times ahead”
      They already are, that is why RBA is driving rates to record lows and will not let them rise, at least for home loans.

    • Oliver Biskus

      Can I ask: last year, the Australian government supported the housing market through a wide range of measures such as moratoriums for rent or mortgage payments. What makes you believe that they will not bring them back as soon as some minor clouds appear on the RE market? The government can avoid a crash for the next two decades or more

    • Anecdotal time: Chynee Savvy Investor (also apparently back on the mainland) is ‘divesting’ of his investment in a nearly 30acres plot of land he subdivided many years ago but had no bites on because of too expensive price tag. Well, he put the prices up by about $120,000 at least and already sold 4 parcels to a bunch of suckers.

      Give you an idea: 5 acres flood prone, no house, plot, $860,000.

      The madness is astounding!

    • Jumping jack flash

      The only ones to get any debt “forgiven” will be the banks. The actual implementation or effect of that might be negative mortgage rates, but it also may not be.

      Banks are currently being subsidised, and in an economy that produces debt that makes sense, but i dont think we are at the stage of “forgiveness”, and if the subsidies work, they may not need it.

  7. The Traveling Wilbur

    Repaying MORTGAGES?!!! This is unprecedented and must be stopped immediately!

    This benefits no one and is not the way the game is played – debt is to be grown and savoured, not repaid. This is what happens when FHB flood the market and haven’t yet learned the ways of The Force.

    Where is Emperor Palpitation when you need him/her?!

    • Jumping jack flash

      This!!

      Debt growth is the way, but we need to take one step at a time. The economy is still healing from 2019 and that period before it where our leaders thought that suppressing CPI using wage theft was a good idea, it almost broke the economy.

      Unfortunately CPI suppression is a policy hang-over from the Howard/Rudd years! It really shows that our current crop of leaders couldn’t think up a new idea to save themselves.

      We have much work to do.

  8. The first and second charts just show that this FOMO credit driven boom is happening on very thin volumes.

    A blow off top if ever there was one.

    What are we booming toward? A return to the end of 2019 pre-Wuflu? We’re past that already in property.

    Bring on inflation and rising rates. The RBA won’t be able to stand its low rates if the US 10-year continues to climb and a falling AUD imports tradable inflation.