FIN111 Lecture Notes - Lecture 9: Mortgage Insurance, Tertiary Education Fees In Australia, Credit Analysis
• Future and present values of multiple cash flows
• Valuing level cash flows: annuities and perpetuities
• Comparing rates: the effect of compounding periods
• Loan amortisation (ordinary annuity)
What is consumer credit?
• Power to buy or borrow on trust.
• Consumer credit is used to meet personal needs.
• Credit increases purchasing power in the short term.
Advantages of using credit:
Credit allows borrowers to
• Increase current purchasing power
• Transact efficiently
• Indicates good financial standing with external parties
• Reduces costs of holding cash
• Reduces record keeping
Disadvantages of using credit:
• Likelihood of overspending
• Reduction in quality of lifestyle if misused
• Adverse legal outcomes (court action, bankruptcy)
Growth of credit in the household sector:
• Amounts and proportions of bank housing finance to owner occupiers and investors.
• Bank lending for housing to persons (billions)
• Growth in bank finance for non-housing lending to individuals.
• Bank non-housing lending to persons (billions)
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By 2010:
• Over 13 million credit card accounts existed upon which 100millions transactions were made
each month - the total amount owing was about $43 billion or about $3000 per card.
• Average household debt was equal to 159% of average disposable income.
• 11.9% of disposable income was needed to meet interest payments on debt compared to 8.7% in
1990.
• The amount of disposable interest payments needed to meet interest payments on disposable
debt since 1999-2013.
Whose debt?
• Proportion of debt by age range:
• Incidence of debt increases with income however debt stress is greater in lower-income
households.
Two basic types of consumer credit:
• Closed-End Credit:
• One time loans for a specific purpose that you pay back in a specified period of time, and in
payments of equal amounts.
• Mortgage, automobile, and instalment loans for furniture, appliances and electronics.
• Open-End Credit:
• Use as needed until line of credit max reached.
• E.g. credit cards, department store cards, home equity loans.
• You pay interest and finance charges if you do not pay the bill in full when due.
Types of credit:
1. Housing Loans
• 70% of Australian households live in a dwelling they either own or are buying.
• Owner-occupied housing loans are usually calculated on principal-and-reducing interest basis.
• Loan period typically varies between 15 to 30 years.
• Flexibility of housing loans provided by low-start/high start loans and fixed/variable interest
rates.
• Mortgage insurance required when loan-to-valuation ratios exceed 80-85%.
• Secondary mortgages market provides greater capital pool available for housing finance.
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