Australian home buyers cut average loan term to 21 years - 9 August 2001

New research released today by the National reveals Australians have listened to the advice of lenders to repay their home loans sooner and save thousands.

Australian home buyers cut their initial home loan term to an average of almost 21 years in 2000. On a typical loan amount, this represents a saving of $24,500 compared to a standard 25-year loan, according to the National.

National home loan customers have an even shorter initial loan term, with an average of 19.2 years in 2000. This represents savings of $40,000 compared to a standard home loan.

The new figures are based on a survey of more than 50,000 Australians by Roy Morgan Research.

The National's Chief Executive Officer, Australian Financial Services, Mike Pratt, said Australian home buyers had listened to the advice of lenders to repay their loan sooner.

"The 25-year or even 30-year home loan is a thing of the past. On average, home buyers are taking just 21 years to pay off their home, while some are achieving this personal financial milestone even sooner."

Mr Pratt said the shift towards shorter loan terms began in 1990 when the National launched the Tailored Home Loan.

"The National was the first major lender to tell home buyers how they could save tens of thousands of dollars with small additional repayments."

He said the research confirmed that National Tailored Home Loan customers were better off than customers with other banks.

"National customers borrow 12% more and still repay their home loan 10% sooner. These are striking differences given the widely accepted view that all home loans are the same. Clearly, they are not," added Mr Pratt.

General Manager, Mortgage Integration, Andrew Linklater, said the average initial loan term for all home buyers had increased slightly from 1996 to 2000. However, there was no change for National customers.

"The increase in loan term across the market reflects home buyers taking advantage of their increased equity and reborrowing to consolidate higher cost debts or fund investments.

"A recent trend is the emergence of customers aged 50 years or more as a key driver of market growth as they reborrow against the equity in their home.

"Across the market, the number of Australians aged 50 years or more with a home loan has risen by 55% between 1996 and 2000. Among National customers, this increase has been more than 80%.

"We believe tailoring has helped to put National customers in a stronger financial position than borrowers with other banks by building equity in their home at a faster rate. They are using this equity more often than home buyers with other banks as a springboard for other investments," Mr Linklater said.

Key findings of home loan research study

• Initial home loan term is more than two years shorter for National customers - 19.2 years versus 21.4 years for customers of other lenders. This difference in favour of National customers has increased from 1.5 years in 1996.
• Remaining home loan term is also less for National customers - 13.7 years versus 15.4 years for customers of other lenders.
• The initial home loan amount of National customers was more than 12% higher than borrowers with other lenders in calendar 2000. This reflects in part the success of the National's marketing to "premium" customers.
• National customers reduce their loan balance more quickly. In 2000, loan amount outstanding of National customers represented 80.5% of initial loan amount, compared to 83.3% for non-National customers.

The National Tailored Home Loan - what sets it apart?

The National Tailored Home Loan is still unlike any other in the market.

The unique features of a Tailored Home Loan are:

• No 25-year repayment schedule. The loan term is structured from day one to the maximum amount the customer can comfortably repay - not a pre-set term of 25 or 30 years.
• Repayments that change just once a year, regardless of interest rate changes. Customers are given a personal "tailored" repayment schedule that changes just once a year on each anniversary of the loan. The schedule generally consists of small, annual step ups in the repayment amount, based on a unique feature known as the reference rate. (This has a similar effect to indexing repayments with rises in inflation).
• More flexible repayments. Tailoring recognises that a home buyer's ability to repay increases over the years as their income moves upward with their career. Even without significant career advancement, the home buyers ability to repay will generally rise because of inflation. A tailored repayment schedule has the flexibility to take account of higher income in later years.
• Affordability rate. Loan approval requires customers to show they can meet repayments at the National's universal Affordability Rate, currently 8.5%. This ensures borrowers do not overcommit in low interest rate environments or when taking advantage of "honeymoon" rates.

In addition to these unique features, the National Tailored Home Loan offers:

• 100% offset
• choice of repayment frequencies
• loan redraw

National Tailored Home Loan - adding up the savings

The benefit of a National Tailored Home Loan has been calculated two ways:

• versus a standard home loan; and
• versus the actual experience of customers with other lenders.

National versus standard loan of 25 years
National customers in 2000 had an average initial loan amount of $137,000 over a term of 19.2 years. The reduction in loan term compared to a 25-year standard loan saves the National customer $40,000 in interest (ie $108,000 interest for the Tailored Home Loan compared to $148,000 for the standard home loan).

National versus other lenders
Customers of other lenders had an average initial loan term of 21.4 years, or two years and three months longer than the average of National customers. Using the same initial loan amount of $137,000, total interest over 21.4 years amounts to $123,500 or $15,500 more than total interest on the Tailored Home Loan.