A Cumulative View Of Mortgage Rate Sensitivity

We had significant interest in our recent posts on mortgage rate sensitivity in a rising market. One recurring request was for a cumulative view of rate sensitivity. So today we post these views on a segmented basis, using our master household segmentation.

A quick recap, we updated our analysis of how sensitive households with an owner occupied mortgage are to an interest rate rise, using data from our household surveys. This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards.

To complete this analysis we examine how much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, and other financial commitments. We then run scenarios across the data, until they trip the mortgage stress threshold.

At this level, they will be in difficulty.  The chart shows the relative distribution of borrowing households, by number. So, around 20% would have difficulty with even a rise of less than 0.5%, whilst an additional 4% would be troubled by a rise between 0.5% and 1%, and so on. Around 35% could cope with even a full 7% rise.

The chart below shows a segment view of this sensitivity. We add the score for each interest rate band. Young Affluent households are most sensitive to rate rises, thanks to large mortgages and static incomes. Young Growing Families are not far behind, but their household budgets are quite different. Other segments are more resilient, though a proportion of Exclusive Professionals are also highly leveraged. This first view takes account only of the owner occupied mortgages.

We can also overlay investment mortgages, and this changes the picture somewhat, when combined with owner occupied statistics. We see that the extra commitments have lifted the rate sensitivity, for example moving Exclusive Professionals from 36% to 54% exposed to a small rate increase.

Overall we see that some households really have very little headroom to cope with rising rates, a symptom of high household indebtedness.  Others are well protected and are also paying ahead.

New Banking Model For Latrobe Valley

Nab says Latrobe Valley residents will for the first time have access to a unique model of financial services – with plans for Victoria’s fourth Good Money store to open in Morwell next year.

A partnership between the Victorian Government, Good Shepherd Microfinance and the National Australia Bank (NAB), Good Money stores offer responsible financial products and services including no interest and low interest loans, financial counselling and affordable insurance.

The Minister for Families and Children, the Honourable Jenny Mikakos MP, said that the Latrobe Valley Good Money store would also be the first to offer in-house financial counselling services.

“We’re working to make sure that local people have improved access to appropriate and affordable financial services and products now and into the future,” said Minister Mikakos.

“Importantly, this will be the first Good Money store in regional Victoria and it will have a financial counsellor on site providing free support, information and advocacy for people who are experiencing financial difficulty,” she said.

The Victorian Government is investing $2.9 million to establish and operate the store over four years. Good Money will initially provide services from the Latrobe Valley Authority site in Morwell until the store opens in May 2017.

Chief Executive Officer of Good Shepherd Microfinance, Adam Mooney, said that the Victorian Government investment in the new Good Money store was an important step in helping to secure the economic future of the Latrobe Valley.

“Over the coming years, Good Money will enable people in the Latrobe Valley to keep their cars on the road, meet the costs associated with education and retraining, and afford the things that keep families running like washing machines and fridges,” said Mr Mooney.

“There is high demand for safe, fair and affordable finance options in many parts of regional Victoria and we’re delighted to open a Good Money store here in Morwell. This store will provide valuable services to individuals and families who are excluded from mainstream finance in the Latrobe Valley region,” said Mr Mooney.

NAB General Manager of Retail (Victoria), Mary Scoutas, said the announcement is part of NAB and Good Shepherd Microfinance’s joint commitment to provide more than one million people on low incomes with access to fair and affordable finance by 2018.

“We know there is a real need for initiatives such as this within the community to help build resilience and reduce the risk of falling into a situation of long-term financial hardship,” said Ms Scoutas.

“The Latrobe Valley Good Money store meets the evolving needs of the local community, extends the Good Money franchise to regional Victoria for the first time and builds on our growing network of stores, with three in Melbourne, one in South Australia and another two set to open in Queensland next year.”

The products and services offered through Good Money include:

  • No Interest Loan Scheme (NILS) – Loans of between $300 and $1,200 for essential goods and services, including educations costs and equipment needed for training.
  • StepUP Loan – Loans of between $800 and $3,000, typically used for car related expenses, that keep people on the road and enable them to get to work, get the kids to school and stay engaged with their community.
  • Affordable insurance – simple car and contents insurance with flexible payment options.
  • Financial counselling – free, confidential and independent debt management and budgeting advice.

The partnership between Good Shepherd Microfinance and NAB has reached almost half a million people in Australia with no and low interest loans since 2005.

Background

The Victorian Government provides operational funding for three Good Money community finance stores in Collingwood, Dandenong and Geelong, with microfinance loan capital provided by NAB. In 2015 Good Money expanded to South Australia and, in 2017, two stores will open in the Queensland. Good Money is a three-way partnership between Good Shepherd Microfinance, NAB and state governments.

Community and Financial Services Sectors Unite to Fight Financial Exclusion

HESTA has joined 12 ‘trailblazer’ organisations from government, business, education and the community sectors to announce collective action to improve financial inclusion and resilience within Australia. At present many vulnerable households find the only place they can go to are  payday lenders or a rent to buy provider.

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HESTA will publicly release its Financial Inclusion Action Plan (FIAP), which details specific steps being taken by the organisation to improve financial resilience for its 820,000 members, 80% of which are women.

HESTA CEO Debby Blakey said the FIAP was an opportunity for the $36 billion industry super fund to assess how it can put in place measures to build greater financial resilience across its membership.

“Three million people in Australia are experiencing some form of financial exclusion, many of these are women, and this puts them at greater risk of poor social, economic and health outcomes.” Ms Blakey said.

This follows a round-table, organised by HESTA in Melbourne last week where experts and academics from a range of organisations including universities, charities and community groups discussed what financial institutions can do to build a more financially inclusive Australia.

“The round-table saw fruitful discussions on innovative and practical steps to build a more a financially inclusive Australia.”

It follows a move by the Australian Government in 2015 to commit to international obligations including the G20 Financial Inclusion Action Plan and the United Nation’s Sustainable Development Goals.

Good Shepherd Microfinance is leading the development of the FIAP program, in partnership with the Australian Government, EY and the Centre for Social Impact.

Good Shepherd Microfinance’s general manager advisory, Dr Vinita Godinho, said financial exclusion was a “wicked problem” with wide ranging impacts.

“Because these people don’t have that ready access… the only place they can go to buy these is actually a payday lender or a rent to buy provider… and these informal providers are much more expensive and many times the business model is exploitative. So what happens is people end up in debt spirals… where they are constantly borrowing more and more in order to repay a more and more expensive debt proposition.”

Godinho said there were also a lot of secondary effects that resulted from financial exclusion and a lack of resilience, such as domestic violence and financial abuse.

Westpac also steps up commitment to support financial inclusion.

Westpac Group confirms its commitment to helping Australians better manage their money, with the release today of its first Financial Inclusion Action Plan (FIAP).

Developed in response to Australia’s commitment to the United Nation’s Sustainable Development Goals, the Plan is a roadmap towards Westpac’s vision of helping Australians manage their money, build their financial resilience, and participate in our economy throughout their lives.

Westpac Group Chief Financial Officer, Peter King, said he was proud Westpac is among the first 12 trailblazing Australian organisations to release a Financial Inclusion Action Plan.

“At Westpac, we believe service leadership extends beyond helping people achieve their financial goals.

“It also means being there to provide support when customers experience financial hardship, helping to prevent them from falling into hardship in the first place, and removing barriers that may be blocking people from accessing banking.

“Our foundational Financial Inclusion Action Plan focuses on key areas where we believe Westpac can make the greatest contribution to financial inclusion in Australia. It brings together the work already in progress across Westpac Group, as well as setting out the specific priorities that will guide our initiatives over the next twelve months,” Mr King said.

The 15 commitments laid out in the Action Plan include enhancing Westpac Assist service for customers facing hardship and tailoring of financial services for specific communities at risk of economic downturn; expanding Westpac’s suite of financial education programs, including targeted education for youth and women over 40; and supporting small business and social enterprise to grow through grants, microfinance loans, access to Westpac’s supply chain and financial education.

The FIAPs of the 12 trailblazer organisations were produced as part of an Australian Federal government and industry initiative, coordinated by Good Shepherd and Ernst & Young (EY).

“Financial Inclusion Action Plans harness the influence and resources of industry leaders like Westpac Group to build a more inclusive economy and ensure that, as our economy grows, we’re not leaving people behind,” said Delia Rickard, Independent Chair, FIAP Advisory Group.

“The organisations that have signed up to Financial Inclusion Action Plans, including Westpac Group have identified practical ways to support the financial inclusion of their customers, employees and the broader community. The initiatives these trailblazers have put forward are much more than nice sentiments and ambitions, they have tangible, measurable outcomes,” she said.

 

Should banks play a role in teaching kids about how to manage money effectively?

From The Conversation.

The Commonwealth Bank has long been active in the space of financial literacy – that is, educating young people about the importance of managing money effectively.

Just recently it announced an overhaul to its “Start Smart” financial literacy programs, which aim to teach children about money.

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The program reportedly includes showing children that “a man is not a plan” by discussing financial inequality and offering positive representations of women managing money.

The catch phrase seems progressive but is loaded with assumptions about women, men, their relationships, and their financial choices. This downplays the economic and social reasons why women’s financial opportunities and experiences tend to differ from men’s.

Pay gap in the workplace

It’s a bold ambition when you consider the broader context. According to the Workplace Gender Equality Agency, the highest gender pay gap actually occurs in the financial and insurance services industry, where senior management positions continue to be male dominated and the difference between women’s and men’s earnings is 30.2%.

Further, when comparing Indigenous females to non-Indigenous male workers with median incomes, the reported superannuation gap is 39%.

Such programs, like the one Commonwealth Bank is offering, are based on the assumption that a combination of guest speakers visiting schools and downloadable resources hold the key to improving financial literacy teaching and learning.

Why are banks getting involved?

The federal government has invested millions of dollars and entrusted the Australian Securities and Investments Commission (ASIC) to lead initiatives intended to help children understand finance.

We have a National Consumer and Financial Literacy Framework, which foreshadowed the development of the Australian Curriculum.

We also have consecutive National Financial Literacy Strategies led by ASIC, that are intended to drive improvements in the way financial literacy is taught and learned in schools.

Consumer and financial literacy has an elevated status across the Australian curriculum, signalling opportunities for interdisciplinary approaches, particularly in mathematics and economics and business.

Financial literacy projects are big business for consultancies. And for banks, manoeuvring under the guises of corporate social responsibility serves to position brands favourably.

The ANZ bank, for example, conducts its Survey of Adult Financial Literacy every three years. This is considered the leading measure of adult financial literacy in Australia.

And the National Australia Bank (NAB) recently released research claiming to measure financial resilience – weaving socioeconomics and psychology.

These strategies are important to them since their houses are not in order. The recent parliamentary inquiry confirmed that the big four banks are troubled by bad behaviour and more effective regulation is needed.

How do children learn about money management?

Children tend to learn about money within their homes in different ways – and those teaching around this area need to be sensitively attuned to this learning.

Children become socialised and oriented to consumer, economic and financial issues through a series of conversations, observations, and experiences – consciously and unconsciously.

Even primary-aged students make surprising, insightful comments that show mature understandings about earning, spending, saving, and sharing money. This is particularly true in disadvantaged communities.

How is financial literacy taught?

Research into financial literacy education in schools – how it is taught and learned – is an emerging field, typically characterised by program trials and evaluations.

Program evaluations tell short term success stories – the rubber really hits the road when students need to apply their learning in the real world down the track.

In 2012, the OECD and Programme for International Student Assessment (PISA) included a Financial Literacy Assessment for 15-year-old students. Australia ranked fifth out of the 18 participating countries and economies.

The findings showed that students in city schools achieved higher scores than students in provincial and remote schools; and non-Indigenous students significantly outperformed their Indigenous counterparts.

Teaching kids about managing money is most effective when classroom tasks are tailored to meet students’ family backgrounds and interests, and occurs at the point of need.

Students enjoy financial problem solving and decision-making experiences that captivate their imagination, challenge them to think, and prepare them for the real world.

Devising financial literacy lessons that create connections between students’ financial literacy learning at home and at school is hard to do without really knowing the local context and students.

Because Australian classrooms are diverse, this stuff rarely comes together “off the shelf”.

Not reaching the most vulnerable communities

The uncomfortable truth is that workshops by so-called finance literacy experts and downloadable teaching and learning resources may not reach and resonate with Australia’s most vulnerable communities.

Planning for financial literacy learning requires an understanding of the school community, interdisciplinary navigation of the Australian Curriculum, and skilful inquiry approaches.

This is what teachers are trained to do, although they need and crave quality professional learning to hone their craft.

This is where funding and support are needed.

The Australian Qualifications Framework and Professional Standards for Teachers mean teachers have never been more scrutinised and accountable.

When it comes to meeting students’ academic, social and emotional needs on any issue, let’s invest in schools and trust teachers to do what they’re qualified to do.

Authors: Carly Sawatzki, Lecturer, Monash University; Levon Ellen Blue, Research fellow, Griffith University

One in four Australian workers financially stressed

Financial stress is now a fact of life for more than one in four Australian workers who say they have low confidence in their financial position and find it difficult to make ends meet.

New research, undertaken by AMP for its 2016 Financial Wellness report, revealed Australians’ confidence in their finances continued to decrease in the past two years from 54 per cent of people confident in 2014 compared to 48 per cent in 2016. Lower confidence is despite an increase in disposable cash held by Australians, rising 6.3 per cent over the past two years.

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Vicki Doyle, Director Corporate Superannuation, AMP commented on the impact of financial stress on individuals in the workplace and business productivity.

“Financial stress is a common occurrence in the Australian workforce, with more than 2.8 million employees, representing one in four workers, under financial stress in 2016.

“People who experience financial stress are more likely to be unable to work due to stressrelated sickness, which can affect their health and morale in addition to lowering workplace productivity – at an estimated cost of $47 billion in lost annual revenue for employers.

“It’s important we find ways to address levels of financial stress in the workplace. We know the real difference financial goals can make in preventing and overcoming financial stress. Australians who have clearly defined goals are much more likely to be financially secure,” she said.

Impact on productivity

The research shows financially stressed employees lose on average 6.9 hours of productive work per week and, on average, are absent 1.3 hours per week due to stress-related sickness.

Financial stress is highest among workers in accommodation and food services, with 35 per cent of people financially stressed. Employees are also at high risk of financial stress in healthcare and social assistance (32%), and administrative services (31%).

“In addition to the personal impact of financial stress, we’re also seeing a significant impact on business owners and operators through lost productivity and employee absenteeism, which is particularly high in the hospitality and healthcare industries,” Ms Doyle said.

Importance of goal setting

While the majority of people, at around 80 per cent of the workforce, already have financial goals in-mind, only 18 per cent of these people have a defined plan to achieve their goals.

“Employers can help their employees to bring clarity and shape to their financial goals by supporting financial wellness in the workplace. If employees have well-defined goals and a plan to achieve them, they are less likely to experience financial stress, helping them to be more productive,” Ms Doyle said.

Additional findings

  • Australians say common triggers for their financial stress are bad debt (50% of stressed workers), the need to save for retirement (35%) and providing for their family (34%). Missing bills and making mortgage repayments also contribute to higher levels of financial stress for 32 and 22 per cent of stressed employees, respectively.
  • Brisbane is the most financially stressed city, with 30 per cent of workers in this region experiencing financial stress. This is followed by Adelaide (25%), Perth (23%), Sydney (20%) and Melbourne (19%). Darwin and Hobart are the least financially stressed at 18 and 16 per cent, respectively.
  • Financial stress is highest in the accommodation and food services industry, with 35 per cent of employees stressed. This is followed by healthcare and social services (32%) and administration and support services (31%). Twenty-six per cent of employees in retail jobs say they are financially stressed.
  • The number of employees experiencing financial stress in the mining industry has significantly increased over the past two years, almost tripling from 9 per cent in 2014 to 26 per cent in 2016.
  • Females are more likely to experience financial stress with 30 per cent stating this is the case, compared to 19 per cent of males.
  • Single-parent families are at higher risk of experiencing financial stress (36%) compared to dual-parent households (21%).
  • Casual workers are more than twice as likely to experience financial stress compared to full-time or part time workers. Fifty-four per cent of casual workers are financially stressed compared to 22 and 27 per cent of full time and part time workers, respectively.
  • Low income is strongly correlated with financial stress with 34 per cent of people earning less than $50,000 p.a. under stress. However, the incidence of financial stress for highincome earners, earning $150,000 and above, is increasing with 16 per cent stating they are under financial stress compared with only 8 per cent in 2014.
  • Retirement is a trigger of financial stress, especially among employees aged 50 years and above. Concerns about retirement is the main cause of financial stress for one in five financially-stressed employees aged 50-59 and almost a third of employees aged 60 or above.

Two million Australians are financially vulnerable

Financial resilience is the ability to access and draw on internal capabilities and appropriate, acceptable and accessible external resources and supports in times of financial adversity.

The Centre for Social Impact (CSI) has released a report today that – in an Australian first – defines ‘financial resilience’ and reveals that 2 million Australians are experiencing a high level of financial stress or vulnerability.

Financial-ResilienceThe report Financial Resilience in Australia 2015 highlights the concept of resilience as a process that ‘enables individuals to bounce back after adverse events and experiences, adapt to changing circumstances, and deal with environmental stress.’ The report defines financial resilience as:

‘the ability to access and draw on internal capabilities and appropriate, acceptable and accessible external resources and supports in a time of financial adversity’.

Over the past five years CSI and NAB have worked in partnership to understand the level of financial exclusion in Australia. Over the past year, the two organisations have sought to redefine thinking beyond access to products and services and to provide a more robust and holistic approach to defining and measuring the level of financial health in Australia.

According to the report authored by researchers at the Centre for Social Impact, based at UNSW Australia, financial resilience is characterised by four components:

  1. Economic resources
  2. Access to financial products and services
  3. Financial knowledge and behaviour
  4. Social capital

“We know that just over 64 per cent of Australian adults are facing some level of financial stress and vulnerability and that one in four people have experienced difficulties accessing financial services in the past 12 months,” said Professor Kristy Muir, Research Director at the Centre for Social.

“These are alarming statistics and what is more troubling is that its people living in social housing, people with a mental illness and people born overseas in a non-English speaking background who are worst off.

“We have redefined thinking around financial inclusion and developed a comprehensive model of resilience that can be applied across the entire population – because financial shocks can happen to anyone, anywhere at any time,” said Professor Muir. “This gives us a much deeper understanding of people’s financial situations, the resources they need to withstand adversity and who in the population fares better or worse – and why.

“Understanding financial resilience provides a clearer understanding not just for individuals, but for socially responsible businesses, government agencies and policy makers, and anyone working with a mission to improve social outcomes, to identify where people are at risk and provide the right solutions at the right time.

“To write this report, we surveyed a representative sample of the Australian population and what we have found is alarming – that 2 million Australians are financially vulnerable, and that people faring worse are those in social housing, those with mental health challenges, and those with English as a second language or who don’t speak English at all,” said Professor Muir.

According to NAB’s GM of Corporate Responsibility Jodi Geddes, “Helping customers better prepare for life’s little and big surprises is an important part of what we do.”

“This research will help the general population better understand what they can do to improve their financial resilience and will inform an evaluation tool to help organisations better evaluate their programs aimed at addressing financial inclusion.” Ms Geddes said.