For many Australians, the family home is their largest financial asset. With an increasing variety of ways to tap into home equity, the temptation to access this wealth is ever growing.
Authors
Rachel Ong ViforJ
ARC Future Fellow & Professor of Economics, Curtin University
Christopher Phelps
Research Fellow, School of Accounting, Economics and Finance, Curtin University
Homeowners increase the debt owed on their home when they borrow against their equity. Standard mortgage home loans now provide facilities for relatively cheap or free withdrawals of equity from the home.
This turns the home into an ATM, which borrowers can access when they choose.
Our new study asks what motivates Australians to tap into their home equity, and how does this behaviour change with age?
Surprisingly, despite having much lower housing equity levels, younger homeowners borrow often, and borrow more, than their Boomer parents.
How common is equity borrowing?
Using 15 years of data from the government-funded Household, Income and Labour Dynamics in Australia (HILDA) survey, we tracked the mortgage debt and repayments of homeowners aged 35 and over.
The chart below shows younger owners are far more likely to engage in equity borrowing.
In 2006, nearly 39% of the youngest homeowners, aged 35-44, borrowed against their home equity. By 2021, this number had dropped to 29%. Despite the decline, it's still 24 percentage points more common than those aged 65 and over. The older group has remained steady at about 5% over the years.
How much do equity borrowers withdraw from their home?
Among those who use their home like an ATM, younger borrowers now withdraw larger amounts than older borrowers.
In 2006-07, equity borrowers aged 35-44 and 45-54 withdrew on average $43,000 and $57,000, respectively (expressed in real values set at 2022 price levels). By 2021, the amount withdrawn by these two age groups had climbed to $70,000 and $100,000.
On the other hand, the amount withdrawn by borrowers aged 55 or older fell from more than $50,000 to less than $40,000.
What motivates equity borrowing?
Young homeowners' equity borrowing behaviours are sensitive to changes in house prices and debt values, and their financial risk preferences. Among those aged 35-44, a $10,000 increase in the primary home value raises the likelihood of equity borrowing by ten percentage points.
Every $10,000 in debt against the primary home reduces the likelihood by 2.8% percentage points. Those willing to take substantial financial risk are eight percentage points more likely to borrow against their home than those who are risk-averse.
Those aged 65+ are not inclined to borrow, and exhibit little change in equity borrowing behaviour with variations in asset, debt, income or financial risk preferences.
Why borrowing practices differ between age groups
As well as being more likely than older homeowners to borrow against equity, the younger group also withdraws higher amounts than their Boomer parents.
This is despite younger borrowers already carrying much higher debt against their primary home. Among those in our study who engaged in equity borrowing in 2021, the median debt before borrowing was $401,000 for 35-44 year-olds compared to $0 for those aged 65+.
As real house prices have risen over decades, the current generation of young homeowners has had to invest more money into purchasing their first home than previous generations.
It's therefore not surprising the primary home is now widely viewed as a financial resource to be tapped into to meet spending needs.
On the other hand, most Baby Boomers bought their first home at more affordable prices than their children, and at lower levels of debt. Now they don't appear to be spending their kids' inheritance by drawing down housing wealth.
In fact, older parents may shy away from equity borrowing to bequeath wealth to children. Some also dislike passing debt on to their children.
Older people may also avoid equity borrowing due to concerns about aged care costs. Some may be hampered by poor financial literacy.
More debt ahead without policy changes
Present trends suggest young homeowners will remain indebted for longer periods, and more and more will retire with mortgage debt.
For indebted retirees, there are real prospects of drawing down of superannuation to pay off mortgages in retirement.
This may impose extra burdens on the age pension system. Another unwelcome consequence, which may add to health costs, is the prospect of debt-related psychological distress among those who can't pay off their mortgage in old age.
If the current trends continue, the great wealth transfer that has already begun looks set to further entrench inequality between those who have access to the bank of mum and dad and those who do not.
Encouraging older people to use their housing equity to fund their needs in old age may lighten fiscal burdens on younger generations. But policy reforms will be needed to relieve concerns about the risks of equity borrowing in old age.
Rachel Ong ViforJ is the recipient of an Australian Research Council Future Fellowship (project FT200100422).
Christopher Phelps does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
