Citibank yesterday launched a report looking at how Australians are using their home and mortgage to generate wealth for their future.
Titled ‘Home as a Financial Tool’, the report has identified a growing trend towards refinancing, with 74% of current mortgage holders having refinanced or started a new mortgage term at some point. It also highlights the extent to which many Australians intend relying on their own home to fund retirement.
But while homes are viewed as a valuable source of post-work funding, the other side of the coin shows that 44% of today’s mortgage holders think it is likely they will have to fund a mortgage in retirement.
One thousand people were interviewed for Citibank’s report which included those currently renting or living with parents. Despite market conditions and difficulties getting onto the property ladder, property ownership is still a primary goal for many. More than one in three (36%) renters, and two in five (42%) people living with parents characterised themselves as ‘first time hopefuls’.
Nation of rolling stones
It seems Australians are happy to put up with the stress associated with moving. Citibank’s findings reveal that only 37% of Australians are still living in their first home with more than one in five (22%) saying they have owned four or more homes.
The ‘home turnover’ has provided an incredible opportunity for the Australian mortgage industry and as a result it has grown increasingly sophisticated.
In the last 10 years or so, the level of activity by industry players like Citibank has really stepped up. We have had to respond to a changing landscape and changing needs – it is not one product suits all anymore like it was 20 years ago.
Commenting on Citibank’s report, Professor John Piggott an economist at UNSW who specializes in the economics of ageing, said that the findings of the report were very interesting, especially regarding the extent of refinancing.
"In the US, where mortgage interest payments are tax-deductible, refinancing occurs very frequently, but it is surprising that it occurs so often here, where this tax break is not available, on owner occupied homes.
"But the tax and age pension incentive associated with home ownership does seem to lead home owners to trade up when they can – this may explain the high turnover picked up by the survey," Professor Piggott added.
Rising property values have provided homeowners with a rich, but often untapped, source of equity. "Our survey revealed a growing trend to refinancing, with three out of four current mortgage holders having refinanced at some point. But it’s the way in which we use the funds from refinancing that plays a key role in the growth of household wealth.
Refinancing for a short-term lifestyle boost, such as a holiday, is in many ways a debt trap. Used wisely though, refinancing can be a powerful financial tool. It can provide access to a more competitive interest rate – savings of which can be ploughed back into the home loan or alternatively, redirected to building other assets like shares which diversifies the homeowners asset base.
Implications of downsizing – the face off
Twenty one per cent of current mortgage holders plan to boost their retirement nest egg by downsizing to a smaller home. Another 17% plan to increase retirement funds by selling investment property. The implications for baby boomers, Australia’s largest single demographic group, is that they will be attempting to find buyers for their larger properties, at a time when lifestyle changes are dictating a trend towards smaller, more compact homes.
A glut of large homes and a constricted market could mean baby boomers are forced to accept a reduced sale price – resulting in a smaller contribution to their retirement pot. It will also mean a shortage of small to medium size properties as cashed up baby boomers and younger homebuyers face off in the market.
Professor Piggott said the next 20 years in the housing market will be interesting.
"In many ways it is an unknown quantity. Baby boomers will be in their retirement, and will not need the large homes they occupied when raising a family," he said. "On the other hand, the tax and pension advantages of retaining the family home are considerable, and this will discourage trading down. The final wash-up is unclear. Probably, the outcomes will be different in large cities, where population pressures are likely to keep growing, from those in regional centres."
The right mortgage is key
Just as we change our home to suit our needs, it is important to make sure you have the right mortgage to go along with it. Martin Barter concluded: "These days mortgages can be tailored to suit our needs at each stage of life. Stick with the wrong mortgage and you will be doing yourself a huge disservice, it could mean the difference between having or not having a mortgage in retirement."
By Martin Barter, head of mortgages at Citibank.*
