Aussies are using loans to pay off loans

Between 50% to 90% of cash saved from interest rate cuts went to mortgage prepayments.

Justin Loiseau

Justin Loiseau hails from the great united state of North Carolina, where he started his first business at the ripe age of five: melting crayons into candles. With the infamous Crayola Crash of 1994, Justin moved on to study economics and environmental studies as a Morehead-Cain Scholar at the University of North Carolina. He has worked in a variety of sectors across the globe, from management consulting to the United Nations, and once spent three months examining invasive snails in Vietnam. Justin discovered The Motley Fool in 2012 and it’s been love ever since. Creativity, contrarianism, kerfuffling… what more could one want? When he’s not playing the Fool, you can find Justin at the University of Auckland, where he is pursuing a Masters in Economics as a Rotary Ambassadorial Scholar. Justin finds biogas digesters fascinating and can unicycle a mile in seven minutes.

Published September 20, 2013 1:37 pm AEST

Low interest rates are meant to stimulate an economy, but recent research suggests Aussies have instead used cheap money to pay back mortgages. A new report from the Reserve Bank estimates that somewhere between 50% to 90% of all cash saved from interest rate cuts has headed straight for mortgage prepayments.

Paying back a mortgage ahead of time might bring peace of mind to homeowners, but it's a hindrance to any hope for a fast economic recovery. With an increasingly expensive Aussie dollar, the nation's starving retail sector has been hit especially hard by the spending squeeze.

Premier Investments (ASX: PMV) Chairman and former Reserve Bank board member Solomon Lew wagged his finger at the Gillard-Rudd government earlier this week for wrecking retail while the mining sector soared. But while Lew lamented an online shopping GST loophole as a main reason for retail's downfall, Aussies may simply have opted for home ownership over hats or hosiery.

Banks may be feeling a funding squeeze, too. Instead of taking out more money from financial institutions, Aussies have been busy paying off outstanding debts. According to the report, total housing credit would've grown by a whopping $10 billion if Aussies hadn't paid off their debts so fast.

Foolish takeaway

In the ultimate global financial recovery Catch-22, consumers' caution is now a liability. From retailers like Myer (ASX: MYR) and David Jones (ASX: DJS) to big banks like ANZ (ASX: ANZ) and Westpac (ASX: WBC), Aussies simply aren't spending like they used to.

While this news doesn't point to tough times for any specific company, investors should expect less-than-rapid recoveries for retail and financial sectors. At the same time, smart spending could signal a shift towards a stronger and more sustainable economy, a certain cause for celebration for any long-term investor. Companies that can adapt to consumer demand are the ones that win out in the end, even if it takes longer than we'd like.

Dividend stocks are a smart way for investors to smooth out earnings as an economy begins to bounce back. Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading

Motley Fool contributor Justin Loiseau has no position in any stocks mentioned in this article. You can follow him on Twitter @TMFJLo.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.