Paying off a home loan used to be easier than it looks. It is now more difficult. here’s why

So you think now is the right time to dive in and buy a home.

I can’t tell you you’re wrong. I can tell you that it would have been better to have done this before the prices started to soar, and if they continue to soar it will get even worse.

At the start of the year, the typical Sydney price was $ 872,000. Five months later, at the beginning of June, it is $ 970,000.

That’s a jump of almost $ 100,000 in just a few months – a terrifically high price for procrastination.

In Melbourne, the typical price has dropped from $ 682,000 to $ 740,500. In Perth it went from $ 471,000 to $ 521,500 and so on.

And banks are starting to withdraw the cheapest of their still very cheap mortgage rates, at this point mainly the four-year fixed rates that were below 2%.

So why not take the plunge, cut your living expenses to the bare minimum, and try to buy a house while it’s as little as possible?

A (slight) reason to lower mortgage rates. Despite the four-year fixed rate increases, the three-year rates barely changed. This is because the Reserve Bank has promised to keep the three-year bond rate constant at 0.1%.

Buying has become a bigger commitment

The three-year bond rate determines the cost to banks of their three-year fixed-rate mortgages.

The Reserve Bank has said it does not plan to hike its cash rate by 0.1% until “early 2024”. Movements in the spot rate determine movements in variable mortgage rates.

But there is another reason to be cautious and take stock.



Read more: Home prices are climbing nicely, but not for the reason you might think


For our parents, buying a house was a great deal, not only because the houses were cheaper – until the late 1990s, houses typically cost between two and three times the after-tax household income, they cost now closer to five – but also because over time the loan has become easier to repay.


House prices as a proportion of household disposable income

Disposable income of households after tax, before deduction of interest payments, including income of unincorporated businesses.
Basic logic, ABS, RBA

Just because mortgage rates were going down – sometimes they were going up – it’s because in our parents’ day wages (and prices) were going up.

This meant that even though someone from our parent’s generation had just taken one of the bank’s tests of their ability to make payments on a mortgage, a few years and a lot of inflation and several big pay hikes on a mortgage. the trail, those mortgage payments were going down compared to everything else.

In the past, wage increases dealt with reimbursements

Many of our parents paid off their mortgages earlier.

One way of looking at it is that the bank’s repayment capacity calculators have been defined too harshly. They ignored future wage increases and inflation.

It’s probably also true that they were set more generously than they could have been in an implicit acknowledgment of what the deputy governor in charge of the economics branch of the Reserve Bank, Luci Ellis, calls ” mortgage tilt ”.

The former governor, Glenn Stevens, used another term, “front loader”.

Mortgages were ‘charged up’

When inflation was high and therefore interest rates were high, rapidly rising wages with high inflation made the service burden “heaviest at the very beginning of a loan, decreasing over time. “.


Reserve Bank of Australia, October 1997

On a graph (and the former governor presented a graph), the line showing payments as part of income tilts over time.

In a world where inflation and interest rates are low, the tilt becomes flatter.

Now (Stevens published the graph in 1997) the line should be almost horizontal.

While wage growth remains close to trough record the Treasury predicts that it will not be much easier to make payments on a home loan over time.

Yet banks still make loans using the kind of formulas they used to use.

If you get a loan, you will be assessed as being able to (fair) make the payments as always, but you will be denied the near certainty of being able to more easily meet the payments over time.

Now we retire mortgaged

This is different from the risk you will also run from rising ultra-low mortgage rates today (which banks take into account when deciding whether to give you a loan).

The proportion of homeowners reaching retirement age while paying off their mortgage has doubled in 20 years. Perhaps this is why some banks ask you for details about your super before giving you a loan. This is not an idle investigation.

Could things get better? Maybe, if we can boost wages.

Evidence given at Tuesday’s Senate post-budget budget hearing is a source of hope and despair.

Super hikes will make matters worse

The budget forecast for wage growth over the next four years is incredibly low – 1.5%, 2.25%, 2.5% and 2.75%

On Tuesday, Treasury Secretary Steven Kennedy revealed that each would have been higher – 0.4 percentage point more – if the government had not persisted with the five planned annual increases in mandatory pension contributions of 0.5% of salary from July.

The Treasury estimates that each increase will cut 0.4 percentage point from wage growth, since employers, who are legally required to pay premiums, will have to find the money somewhere.


Commonwealth Budget, 2021-2022

This is the same conclusion that the review of government retirement income came to.

That’s a reason to be hopeful, because it means that when these five increases stop (in mid-2026, or sooner if the government stops them halfway), wages could rise more sharply.

It’s a cause for desperation because if the treasury is right, we are denying ourselves any pay raises we could use in exchange for super that we will increasingly use to pay off our mortgages.




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