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More savings after RBA rate cut as half of Australian borrowers already ahead on mortgage repayments

ByDavid Gordon

The savings nation sentiment continues following the latest interest rate cuts.

Just 2% of home loan customers will spend their cuts on retail purchases, with 57% planning to use the latest reduction in rates to increase their mortgage repayments.

A poll by The Loan Market poll found a further 21% of the 856 online poll respondents would increase savings with the lower interest rates.

Some 20% said they would be looking to refinance.

“The Reserve Bank of Australia reducing the cash rate this month by 50 basis points to 3.75% was a welcome relief to borrowers even though most banks have not passed on the full rate cut,” Loan Market spokesman Paul Smith says.

The Loan Market poll asked “How will you take advantage of the May interest rate reduction?”

In February it was noted by the RBA that the determination of Australian mortgage holders to keep ahead of their mortgage repayments and pay off their home loans more quickly was a key reason why Australia is likely to avoid a US-style housing collapse, according to Luci Ellis, head of the RBA’s financial stability department.

In a talk delivered at a mortgage industry conference in February, Ellis presented a graph that shows the percentage of mortgage holders ahead of their repayments has not fallen much below 50% over the last 10 years.

It shows that in 2009, in the aftermath of the GFC, the percentage of borrowers ahead of their repayments rose above 50%.

“Estimates vary, but it seems as many as half of owner-occupiers with mortgages pay it down faster than the contract requires,” Ellis said.

“The faster they pay it down, the less likely they are to end up in negative equity; they have a head start if prices should fall.

“Some of them must be running their debt down quite fast: data from lenders suggest that the total amount of excess repayments made is similar to the amount of required repayments. This is a welcome feature of the Australian market that is rarely seen overseas,” she said.

Ellis also highlighted that Australian lending standards have remained tighter than in the US due to stricter prudential supervision.

“Unlike in the United States, in Australia most mortgage lending is done by firms that are prudentially regulated. And unlike in the United States, there is only one prudential supervisor, APRA.

“Australian lenders can’t arbitrage differences in prudential treatment across different regulators.”

She also highlighted the raising of the bar in the area consumer credit protection, with ASIC appointed as credit regulator in July 2010.

“Consumer protection standards for credit products have in recent years been broadened, and shifted to a national framework administered by ASIC,” she said.

“But the earlier state-based system still had the three features most needed to avoid US-style problems: it was nationally consistent; it covered all consumer borrowers; and it covered all lenders consistently, regardless of whether they were prudentially supervised or not,” Ellis said.

(article from propertyobserver.com.au)

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