I refinanced a few mortgages this week and have been nothing short of stunned at (a) how cheap housing repayments now are in Australia, and (b) the buffer built up in recent years.
It's a feature of Australia's housing market that when borrowing rates fall, banks don't insist on changing mortgage repayments, rather they just allow a buffer to be built up by the borrower.
Some of the impacts of this over recent years have included that, contrary to what people might have you believe, Australians are simply miles and miles ahead on their mortgage repayments - the equivalent of two full years on average - and the proportion of mortgage debt to housing valuations has fallen to low levels.
Further, Australians now have $60 billion in mortgage offsets, non-performing loans have fallen, while evidence of foreclosures have essentially disappeared.
It's been a golden period indeed for home-owners.
"It's a distinctive feature of the Australian housing market that gives borrowers a vital buffer should the economy take a turn for the worse. It is also a major reason policy-makers have been sanguine about a run-up in house prices that some worry could morph into a bubble if left unchecked...talk of bubbles belie years of sober saving by borrowers who have built up sizeable equity in their homes by paying down their mortgages at an accelerated pace.
"It's a huge advantage for the market," says Michael Workman, a senior economist at Commonwealth Bank, who estimates 70 percent of borrowers across the four major local banks are ahead on their mortgages by at least 10 months.
"To be a genuine threat, rising home prices need to be driven by leverage, and that's just not happening while so many are ahead on their debt."
Australia is unusual by global standards because around 85 percent of all mortgages are at variable rates and, unlike fixed rate loans, there are no penalties to paying off early.
Banks do not automatically cut payments should official interest rates fall, instead the borrower has the choice whether to reduce their payments or not.
The system has proved so effective the International Monetary Fund highlighted mortgage "pre-payments" as a distinct advantage of the housing market when it gave the financial system a clean bill of health earlier this year.
"Australia encourages the early repayment of mortgages by not imposing penalties on households who pay down their mortgage. Thus households could weather temporary shocks to income or interest payment spikes," the IMF wrote.
Indeed, when interest rates dived in the wake of the global financial crisis many homeowners decided it was prudent to run down debt faster and chose to keep their payments up.
From 2008 to 2012, consumer surveys consistently showed that around a quarter of all respondents considered paying down debt the wisest form of saving.
The trend makes sense given the amount that can be saved over the life of a loan. If, for instance, a borrower paid an extra A$200 a month on a A$300,000 mortgage at 7 percent over 25 years, they would save A$76,000 in interest payments and be mortgage-free almost 5 years sooner.
The tactic has certainly been widespread. The Reserve Bank of Australia (RBA) estimates that more than half of all owner-occupiers and near 40 percent of investor owners are ahead on their mortgage payments. In total, more than 40 percent have a buffer greater than one year's payments.
Also popular have been mortgage offset accounts, where households deposit cash which offsets their mortgage balance and reduces interest payable. These currently hold around A$60 billion, having grown from almost nothing a decade ago.
As a result, the RBA estimates that the total mortgage buffer in Australia has risen to almost 15 percent of outstanding balances, equivalent to around 24 months of scheduled repayments at current interest rates.
"This suggests that many households have considerable scope to continue to meet their debt obligations even in the event of a temporary spell of reduced income or unemployment," was the central bank's conclusion in its latest overview of the financial system.
It also means that Australians have an awful lot of equity built up in their homes, so it would take a much larger fall in home prices to put them in the red. While mortgage debt outstanding amounts to A$1.3 trillion, the government statistician puts the value of all homes at a cool A$5 trillion.
When ratings agency Fitch looked at A$180 billion of Australian mortgages last year, it found just 0.5 percent of them were in negative equity, while the loans accounted for just 57 percent of the value of the homes.
All of which stands in stark contrast to borrower behaviour during the U.S. housing bubble, when many owners used their homes as ATMs, withdrawing money through home equity loans or cash out refinancing.
In 2005 alone, U.S. homeowners extracted $750 billion of equity from their homes, according to the Federal Reserve. That was up from just $106 billion in 1996.
Thus when prices started falling all too many were quickly under water, with the homes worth less than the outstanding mortgage. That was a major cause of the flood of foreclosures that so blighted the housing market there.
In Australia, foreclosures have been vanishingly rare at less than 0.1 percent of the housing stock, while the non-performing share of banks' housing loan portfolios is just 0.6 percent.
"The culture here is use a home as a store of wealth," says CBA's Workman. "Instead of taking equity out people use it to trade up to a bigger home. It's a quirk that has served Australia very well."