82 thoughts on “Sandpit

  1. BilB, I’ve replied to your specific question. My reply doesn’t show even though I got a message of repeat submission.

  2. “My reply doesn’t show even though I got a message of repeat submission.”

    Ah, so it doesn’t just happen to me. It’s very frustrating, isn’t it? Bloody WordPress. It will never ‘turn up’ despite BilB’s optimism. Your best bet is to try again.

  3. BilB, I have made minor changes to the text to test whether some words caused my post to not get through.

    The specific question you asked is a straight finance question rather than a financial economics question, IMO.

    The finance question is:
    Given a loan amount L, gross annual income Y, a fixed interest rate, r, for a loan period of t=25 years and a compulsory superannuation of 9% of Y, by how much could the loan repayment period be shortened? The answer depends on the parameter values. In general, the way to answer this questions is:

    1. L = X[1/r-1/[r(1+r)^t], where X is the mortgage payment at t = 1, 2, …, 25 if annual payments (if monthly payments then t=1, 2, …,(25*12)

    Solve for X.

    2. L = X+.09Y[ . ].

    Solve for t (trial and error; annuity tables or a mini-iterative program)

    From a purely financial point of view of a decision maker, who is not under financial distress, a shorter repayment period for a loan used for the acquisition of an asset (residential property) is strictly preferred if the home loan interest rate is greater than the rate of return on a portfolio in an accumulation superannuation fund with a similar risk characteristics.

    I couldn’t find a long enough time series (25 years) on portfolios in my superannuation fund (industry fund). But I have enough data for 10 years; annual data only. Housing loan interest rate data is available from the RBA. In the following Table I list the two portfolios for superannuation (cash and balanced) and a housing loan indicator rate for the years 2000/01 to 2009/10. The superannuation crediting rates are net of investment expenses but gross of account-based fees (ie they are a little overstated).

    Period Cash Balanced Housing interest rates (variable Banks; average monthly rates)
    2000-01 5.3% 5.9% 7.61%
    2001-02 4.3 -2.8 6.32
    2002-03 4.28 1.01 6.55
    2003-04 4.75 14.17 6.86
    2004-05 5.08 15.08 7.13
    2005-06 5.50 14.48 7.34
    2006-07 6.11 14.92 7.95
    2007-08 4.98 -6.03 8.79
    2008-09 3.72 -9.12 7.27
    2009-10 3.70 9.57 6.55

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