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Australians have an unusual habit of paying off their mortgages much faster than borrowers in most other rich nations, a valuable trait that gives households a safety buffer were the economy to slow sharply.

Around half of all borrowers are ahead on mortgage payments, the Reserve Bank reported today, a level only reached by Canada among developed nations.

“In this way, many households have a buffer that they could temporarily draw on to stay current on their loan repayments if their incomes were to fall,” the central bank said in its semi-annual report on financial stability.

This peculiar feature of the local market was noted by officials from the International Monetary Fund in the country recently to assess the local banking system. It was one reason the IMF awarded the banks top marks in a series of stress tests, setting them apart from many of their global peers.

In total, the RBA estimated mortgage prepayment buffers in Australia were equivalent to around one-and-a-half years of scheduled repayments based on current interest rates.

Indeed, the RBA said liaison with major banks suggested 15 per cent of borrowers were ahead by two years or more.

Of those borrowers that were ahead on their mortgage, around 45 per cent had a buffer of up to six months; 15 per cent had a buffer of between six months and a year; and over 40 per cent have a buffer greater than one year’s repayments.

That adds up to a lot of money. The total stock of Australian households’ prepayment buffers was put at over 10 per cent of the $1.25 trillion in outstanding home loans.

This urge to get ahead on a home loan is partly due to a greater sense of caution since the global financial crisis badly shook confidence in financial systems globally.

But it is also encouraged by Australia’s tax code since owner-occupiers have an incentive to pay ahead of schedule as their interest payments are not tax deductible.

That could well be why the share of borrowers making substantial repayments of principal jumped to 22 percent in 2010, from an average of 15 percent in the five years to 2007.

The pace of prepayment had also risen since the RBA started cutting interest rates in November last year, in part because most borrowers choose not to change their regular repayment amounts when rates fall.

The RBA cut rates by 125 basis points between November and June and is widely expected to ease again in the next month or so.

Story source: Reuters  and

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