How the crack down on liar loans will affect you as a property investor

Were you completely truthful last time you asked for a loan? 

Apparently many Australians (up to one in five) fudge their loan applications, leaving out little details — and sometimes significant details — leading to a $500 million pool of what have been called “liar loans.”

The result is that Westpac, which has been the focus of investigations by ASIC and the Royal Commission into Banking, has introduced a tough new regime of scrutinising loan applications to ensure all new loans comply with the standards of responsible lending.

And if history repeats itself, the other banks will follow suit given the widespread nature of “liar loans” where applicants under declare expenses or inflate income to secure loans they are probably not qualified to receive.

To better understand what’s going on, here’s a little Q & A:

What are liar loans?

Last year investment bank UBS’s research department surveyed 1,000 recent home buyers and found that only 67 per cent of respondents said their mortgage applications were “completely factual and accurate.” 

This means about one third of mortgage applications contained factual inaccuracies leading to the attention grabbing headline that there might be $500 billion in what UBS calls “liar loans”.

Most were white lies understating living expenses, something very difficult for a bank to verify.

Understating other debts, overstating income or overvaluing existing assets were the other common misrepresentations.

What’s happening now?

ASIC is currently taking Westpac to court over this issue and the Royal Banking Commission into Banking has been investigating this, resulting in banks becoming much more careful in their scrutiny of loan applications.

What does this mean to me?

If you’re applying for a loan you can expect to be asked more question and you’ll need to verify details of your income, living expenses and loan commitments.

While there is nothing new about this, what is different is the level of detail you’ll have to provide.

Westpac sent out a note to mortgage brokers and its branch staff telling them that the number of expense categories customers will have to fill out and verify will more than double.

Westpac will have 13 expense categories it uses to assess a borrowers' capacity to repay loans and each incudes detailed descriptions of what needs to be disclosed.

Borrowers will be quizzed on their gambling, alcohol and tobacco consumption, and their telephone use, as well as mandatory disclosures including clothing and personal care, groceries, medical and health, transport, owner occupied property utilities and, for the first time, investment property utilities, rates and related costs.

For example, it will require evidence of typical supermarket spending for groceries, including food and toiletries.

Under another category, borrowers will be asked about how much they spend on recreation and entertainment, including alcohol, tobacco, gambling, restaurants, any club membership fees, pet care and holidays.

Other categories required detailed disclosure on investment properties including rates, taxes, levies, body corporate and strata fees, repairs and maintenance.

Spending on telephones — both home and mobile — internet, pay television and media streaming subscriptions will also be required.

What will the end result be? 

Home buyers and investors will get frustrated with these even tougher hurdles to jump to get a loan, but this enhanced "responsible lending" regime is meant to give us a more stable secure banking system that will be less vulnerable to sharp economic corrections.

Recently UBS's economics team warned there is a growing risk that these tightening underwriting standards could spark a "credit crunch" and plunge the economy into recession.

While I can’t see that happening, no doubt it will be harder for some borrowers to get a loan in the future as they have to declare their "true" income and expenses and at the same time the loan approval process will take a lot longer.

About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.