Courtney C. Lipsey What are our truths in contracting the terms of loans offered in Australia?
With the pressure increasing in the market for housing, a few of us may be enticed to lie in order to get a mortgage for our dream home – but studies show that this kind of behavior could have serious consequences.
The recent news coverage has warned consumers of the dangers of “liar loans” based on the results of a brand new UBS study. A liar loan can be described as a one-time loan that is authorized by the lender on the basis of potentially false information regarding the amount of money, assets, or ability to pay.
In the United States, many loans have been granted without any proof of the borrower’s earnings and assets. The liar loan has been identified as an important cause of the global financial crisis.
Should we be worried in Australia?
The UBS study found that nearly three-quarters of Australian mortgage borrowers said they were “not factual or accurate” when they applied for mortgages. It is important to note that being “not accurate” is not the same as being a “liar.” However, we should be vigilant and aware to stay clear of poor ethical standards and methods.
The researchers also believe that there are about 500 billion dollars (A$657.95 billion) worth of flimsy mortgages in the books of banks in Australia. This is a concern since it could mean that the borrowers are taking on higher debts than they are able to pay or can afford, causing financial strain or even losing their homes.
The Australian situation
In Australia, when applicants are seeking a loan, they are required to submit documentation that proves their employment history and creditworthiness, as well as their overall financial status. In order to be eligible for a loan, borrowers must submit the most recent payslip or tax returns, as well as prove that they’ve worked in the same position for at minimum 12 months.
Other documents could include credit card and bank statements, sales contracts con, the formation of rental income in the case of investing in a property, and many more. The mortgage originator could conduct credit checks, defaults, or bankruptcy searches.
Certain mortgage borrowers will not need to submit any documentation in the event that they are current customers of the lender and have a solid credit history.
In my study, I discovered that 88.8 percent of mortgage applicants are customers of the bank from which they applied for the mortgage and have been for 9.3 years in total. However, low-documentation loans are available to self-employed customers.
The area where the precision of mortgage applications becomes difficult to judge is when it comes to estimating the costs for the family. Mortgage applicants will be asked about their monthly expenses in order to determine if they are able to pay the loan without stress. The applicants could appear to be “mostly factual and accurate” or “partially accurate” when trying to determine how much they spend each month. In the end, how many people keep up-to-date and accurate spreadsheets of their expenses?
The outstanding debts of other financial institutions or with family and friends could also be reported incorrectly. Additionally, mortgage lenders who earn commissions tied to the loan’s size are enticed to exaggerate the amount of income a borrower makes and underestimate costs.
Australian version of Liar Loans?
These arguments do not mean that there’s no “lying” or “truth hiding” in mortgage applications in Australia; however, it might not be similar to the trends in “liar loans” seen in the US.
Additionally, banks should not solely rely on the word of their customers. Banks make estimates of each month’s expenses as well as non-committed income for their clients based on the borrower’s traits and their financial documents.
The data from earlier studies shows that banks calculate that, on average, they spend more than A$1,637 on monthly expenses than applicants claim. Based on bank calculations, the housing market underestimates its monthly payments by an average of A$1,932. Average, while owners underestimate their monthly expenses by an average of A$1,560.
In the same way, mortgage applicants declare their monthly uncommitted earnings as being, on average, A$702.5 higher than the amount that the bank estimates to be. Housing investors can only overestimate their monthly uncommitted earnings by A$174 per month, and owner-occupiers exceed by averaging A$840.
Due diligence is required of both borrowers and banks
Research discovers these mortgage options (for example, adjustable or fixed rates, maturity, loan-to-value ratio, and more) aid borrowers in selecting mortgage options that are cost-effective and safe for them with the help of mortgage brokers and lenders.
The study also suggests that lenders must ensure that the borrowers have the financial capability to pay their loans through earnings or by reasonably selling assets instead of depending on the worth of collateral.
The rate of default and delinquency in mortgages could increase due to risk-taking in mortgage lending, accompanied by the economic downturn, or because of a decline in earnings and rising unemployment in an economic downturn in the housing market. This is the latter case and is more likely to be the most serious threat in the Australian present economic climate.
Read more: Financial crises 101 could provide lessons for all
The Australian Prudential Regulatory Authority ( APRA) and the Reserve Bank of Australia ( RBA ) perform stress tests to check the financial system’s resilience. Along with APRA’s macro- and micro-prudential regulations, some lenders are introducing higher requirements and credit restrictions on potential borrowers.
This includes obtaining more details on the client to help evaluate the risks of default and credit risk and assists in designing and directing financial products for a specific category of clients. However, there is the possibility of being discriminated against in the mortgage market.
Monitoring more carefully is required.
The most common causes of mortgage risks are differences in the products that are used by homeowners, financial capability, and their ability to take on risk. This is why lenders and banks should closely monitor the characteristics of mortgage products.
The Organisation for Economic Co-operation and Development ( OECD) recommends that financial institutions should ensure that the lending standards are sane for both banking and non-banking industries. Banks mustn’t be subject to incentives that encourage excessive risk-taking.
Transparency is essential, as well as ensuring consumer protection, and providing financial education ensures that lenders and borrowers follow sound methods.
