‘Liar loans’ on the rise as risky mortgages drive house price boom

By business reporters Michael Janda and Gareth Hutchens

A sold sticker on a for sale sign.
Based on a survey of around 900 borrowers, UBS estimates that 41 per cent had inaccurate mortgage applications.(ABC News: Elise Pianegonda)
Australian home prices have surged almost 20 per cent over the past year, and investment bank UBS has warned that a record level of “liar loans” as buyers “chase the market” could be one reason why.

The bank’s annual survey of around 900 people who took out a mortgage over the past year showed that 41 per cent submitted loan applications that were not completely factually accurate — so-called “liar loans”.

That is a record high in the seven years UBS has collected this data, up from 38 per cent last year and 27 per cent back when the survey started in 2015.

It is noticeable that there was a brief dip during the banking royal commission hearings in 2018, at a time when the banking and financial regulators were also cracking down on risky lending.

Graph showing proportion of liar loans each year since 2015.
Now in its seventh year, the UBS liar loans survey showed a record proportion of factually inaccurate mortgage applications.(Supplied: UBS)

While the majority of those who fudged the figures said their applications were “mostly factual and accurate”, just under a third of those who lied to their bank said their application was only “partially factual and accurate”, holding at a record high.

The most common areas of inaccuracy were under-representing living costs (34 per cent), under-representing financial commitments (28 per cent) and over-representing income (22 per cent).

Worryingly, the size of the misrepresentations also went up in 2021.

Of those who overstated income, 36 per cent did so by more than a quarter.

Likewise, 39 per cent of those understating living costs did so by more than 15 per cent.

Four photos of properties are placed in a grid, with a red silhouette of a house saying 'SOLD' and a key.
Australian house prices have posted their biggest increase since 1989, jumping 18.3 per cent over the past year.(ABC News)

UBS said the rising risk of home lending fuelling the current property boom was best captured in a record rise in “very high” debt-to-income mortgages — where the borrower owes at least six times what they earn each year — to 21.5 per cent of loans.

“Amid home prices booming 18.3 per cent year-on-year (highest since 1989), we think borrowers are ‘chasing the market’ and stretching towards their capacity limit to be able to qualify,” the report said.

This has been aided by a reduction in the interest rate at which loan applications are being assessed, which is now around 2.5 percentage points above actual mortgage rates, down from more than 3 when tougher so-called macroprudential lending rules were last in place.

UBS graph shows actual home loan rates versus assessment rates.
Home loan assessment rates have dropped as interest rates have fallen and as tougher lending standards have been somewhat relaxed.(Supplied: UBS)

As with previous UBS liar loan surveys, borrowers who used mortgage brokers were far more likely to submit inaccurate applications (44 per cent) versus those who applied directly through a bank (29 per cent).

In the vast majority of those cases, borrowers said the mortgage broker advised them to falsify their application.

Graph showing proportion of people where broker or banker suggested lying.
The UBS data shows mortgage brokers were far more likely than bankers to suggest putting inaccurate information on the loan application(Supplied: UBS)

Property investors were also more likely to falsify their loan applications (at 53 per cent with one investment property and 57 per cent for those with two) versus owner-occupiers (31 per cent).

Buyers of rural and regional property were also more likely to have falsified loan applications, which was a new trend in 2021, perhaps as the level of sea and tree-changing increased.

Regulator plays down home loan fears

The same morning UBS released its latest findings, banking regulator APRA appeared before the House of Representatives Economics Committee with a very different message.

“The issue of concern at present is that there is an increase in high debt-to-income lending, but it’s offset against a number of other metrics which are going in a more positive direction from a macroprudential perspective,” APRA chair Wayne Byres said.

Mr Byres pointed to a decline in high loan-to-valuation ratio and interest-only loans…

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