How well do you know your mortgage?
The very well-respected bank team at UBS published a very interesting piece of research today that we believe is well worth taking a look at. The team performs an annual survey of Australians who have taken out a mortgage during the previous 12 months. The survey covers 1008 individuals and is spread both geographically and in loan size, so the findings are statistically significant for the overall population. They have published quite a few different reports looking at the data from different angles, but today’s version is very interesting for the insights it gives into the financial literacy of Australians.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
INVEST WITH MONTGOMERY
mick commins
:
Figure 1
44% + 43% + 18% + 11% + 17% + 4% = 137% ???
Andreas Lundberg
:
Hi Mick,
Respondents were allowed to tick several motivations which explains why it sums to more than 100%
MICHAEL BARRETT
:
Picking up on Chris & Andrew’s points – many Australian’s take a bet each way and are deliberately “naive” about money. Focus on the raw cost of borrowing money rather than why the money is so cheap to begin with, pretend to be the financially innocent “babe in the woods” and not understand what is going on around you (but also betting on a big return on the cheap money all the same), with the overarching philosophy of the nanny state bailing you out if and when it all goes to s*%#…..nice, except this time I think the effects of the property crunch will be so widespread and long lasting that it will be beyond the abilities of a single government to provide effective counter measures with their appointed term – and (using energy policies as an example) we can see how ineffective our governments are in managing modern markets, even in these good times…..
Luke Fennell
:
This article is actually pretty scary. Sadly it comes not as a surprise to me but it is concerning that my suspicions regarding how naive people are in not understanding the difference between speculation and investment. Well done Andreas.
Shaishav
:
Do you know anyone who publishes data on how much percentage of money compared to loan is in Offset accounts? Because i know few ppl who have there houses paid of effectively if you consider money in offset and want to upgrade so they only do interest only loans. Again small sample but the percentage of money sitting in offset might give more insight
Andreas Lundberg
:
Hi Shaishav,
I have not seen that data. Agree that it would be interesting to see but it would not be that relevant to the data in this article as it only deals with new loans taken out in the last 12 months and I would suspect that there are very few loans that have significant offset balances after less than 12 months.
Graham
:
I agree with Shaishav. I think this factor needs to be considered so getting the data to establish a trend going forward would be useful towards this analysis. I have clients who might take out an interest only loan and the money is drawn into an offset where it remains fully offset until required for a specific future purpose. They may also take out this type of loan to fund a long term regular investment strategy but the money is structured to be drawn from an offset account rather than a line of credit. The way this data is analysed shows an interest only loan being taken out with no corresponding recognition that the loan is fully or partially offset.
Furthermore, I may advise clients to take out a higher loan than what they need in order to create a cash buffer which would sit in an offset account. Similarly, this would not be reflected in the figures.
Chris
:
I’m drawing a parallel between Andrew Ronan’s comment re: “let’s blame the banks” (and by the way, I completely agree with his sentiments) and when people got advice from Storm Financial during the GFC.
They were quite happy (and greedy enough) to chase the tax benefits, negative gearing and were happy enough to effectively, drive down the road at 100km/h in turbo mode (which is what you do when you double gear into an elevated sharemarket, as they had done) but then cry their eyes out when ‘but no one told us it could go wrong’ when it did.
Most people are financially illiterate, but it is no one else’s fault except their own and usually because they are too lazy to learn, or because they have outdated beliefs about money that having it is somehow bad, incorrectly quoting 1 Timothy 6:10.
Brian_Byrne
:
Is it explainable by rentvesting? Hard to see anything other than a banking system crisis occurring followed by a bail out, higher taxes, lower consumer spending, higher unemployment etc etc.
andrew ronan
:
Sounds like lets blame the naughty banks for our lack of understanding of all things financial even though we were smart enough to calculate the negative gearing benifits of this cant lose deal. I have no sympathy for gamblers but id say our stupid government does have and will bail them all out with some kind of nation saving tax payer funded tripe that will not be extended to others who have lost money producing real things for real markets due to over capacities and subsidies etc etc. The place makes me sick. Save the fools and burn the rest. And then wonder why we become so politically divided.
Andreas Lundberg
:
Hi Andrew,
Let’s hope it does not end up with that! Also, I am not sure that you are right in that people are actually able to calculate negative gearing benefits. I have spoken to quite a few people who actually thinks that negative gearing is “earning” them money instead of just offsetting a loss they are making…
andrew ronan
:
I guess your right, I’m probably giving them to much credit, after all if you are investing in a highly levered property with full knowledge of its guaranteed negative cashflow on the pure speculation that a bigger fool will welcome an even larger negative cashflow in order to purchase the property from you, then I guess your either extremely optimistic or extremely something else entirely.
jimbo james
:
Yes I bang my head against a wall every time I ask a mate about the pitiful yield on his investment property. The answer is always the same……’dunno, but i got a 13 grand tax refund this year’……..
Brett
:
One reason why owner-occupiers are giving ‘maximising negative-gearing’ as their motivation for taking out an interest-only loan is that they are currently living in the property, but plan to move out and rent the property in the near future. No point paying off loan principal if one plans to convert to tax-deductible debt.
At least that describes my own situation as an owner-occupier with an interest-only loan.
Actually my lender has recently been bugging me to switch to a P&I loan. I am ignoring them for now…
Andreas Lundberg
:
Hi Brett,
That can certainly be the case but I doubt that there are that many people who are planning to do that.
Andre
:
Andreas,
This type of data is the reason that I believe that APRA will balk at enforcing the cap on IO loans. The risk to the broader economy is just too great. If unemployment starts to rise on the back of increased mortgage stress, I feel that political pressure will mount to ensure more options are made available for those struggling to migrate to P&I repayments
Andreas Lundberg
:
Hi Andre,
You certainly have a point
jimbo james
:
Might be right, but circa 2014 these types of loans skyrocketed, many driven by bank hardship departments as a way of reducing the pressure for problem borrowers. At some point they need to save people from themselves. Yes they can turn the taps back on but at some point the piper has to be paid and it will turn an already disastrous situation into an epic one for the ages.
Chirayu Oza
:
Thanks for the interesting research Andreas. I note that the Montgomery fund owns shares in NAB and Westpac. If there is a prolonged and severe downturn in Australian housing as many commentators have predicted, earnings for big four banks will be under pressure. Doesn’t it therefore make sense to reduce exposure to banking stocks ? Can you please also advise what steps the fund has taken to reduce exposure to a falling housing market in Australia?
Andreas Lundberg
:
Hi Chirayu,
We do indeed own NAB and Westpac but overall, we are very underweight the banks. Our exposure to them is about 1/3rd of what the ASX200 index has. For portfolio construction reasons, it is very hard for us not to have any ownership of the banks.
Generally, we are trying to be as little exposed to consumer spending dependent companies as possible and as much exposed to foreign earnings as we can. Our cash weighting also comes in to play here.