Finance Property How borrowers, brokers fudge numbers to get a home loan

How borrowers, brokers fudge numbers to get a home loan

Home loan application
One in three applicants have admitted to giving their lenders information that is “not completely factual and accurate”. Photo: Getty
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Almost one in every three home borrowers lie about their financial circumstances to their lenders, according to a new survey conducted by one of Australia’s leading bank analysts.

While 28 per cent of borrowers concede that the information they give their lenders is “not completely factual and accurate”, the survey found the country’s rapidly growing army of mortgage brokers encourage them to fudge their income and living expenses to get loan applications approved.

UBS bank analyst Jonathon Mott, who collated the online responses of 1228 home borrowers to questions about their mortgage applications, described the findings as “disturbing”.

“It is highly unlikely that the respondents would have stated they misrepresented their mortgage documentation when they were in fact truthful,” Mr Mott said.

“If anything, we believe it is more likely these figures may understate the level of misrepresentation in mortgage applications as some respondents may not want to state they were less than completely accurate despite anonymity.”

Prospective home borrowers are less likely to lie about their financial position if they applied directly through a bank for a mortgage.

Of those borrowers who admitted to misrepresenting their loan documents, only 13 per cent said a banker had helped them to “cook” their application.

However, two in every five borrowers who went through a broker said they were advised to fabricate or massage their financial details.

Broker-induced fraud on the rise

Although the selling tactics of bank staff are exposed to tight monitoring by financial regulators such as the Australian Prudential Regulation Authority, mortgage brokers are only a lightly regulated segment of the lending industry.

But the findings of the UBS survey indicate this could soon change because the incidence of broker-induced fraud seems to be spiralling out of control.

In its 2015 survey, only 24 per cent of respondents said they had faked their financial records after brokers advised them to do so.

That rose to 41 per cent in the 2016 survey.

Supporters of loan restrictions in Australia have cited New Zealand's experience.
The survey results have been described as ‘disturbing’.

Mr Mott said the finding indicated that more rigorous auditing of applications was now necessary, especially those lodged through brokers.

Mortgage brokers accounted for more than half of all home loans originated in Australia last year and some bank analysts are concerned that loose supervision of their activities might be contributing to the build-up of credit risk in the banking industry.

Brokers rely almost exclusively on lucrative commissions and other sales incentives to generate income, so they are likely to be more motivated than bank staff to push clients into credit products.

Research conducted by The New Daily shows that banks pay brokers up-front commissions of around 0.63 per cent of the value of the home loans they write.

They also receive trailing commissions worth around 0.2 per cent for every year it takes a borrower to pay off their mortgage.

On a $400,000 mortgage, that equates to around $2100 upfront commission and an annual trailer of $800.

Brokers pocketing huge bonuses at borrowers’ expense

What do we lie about?

Brokers might advise clients to alter their income or regular living expenses to make sure a bank approves an application.

According to the UBS survey, the most common method used by applicants to fake mortgage applications is to understate the living expenses.

About 26 per cent of survey respondents who manipulated their financial documentation said they understated the monthly costs of food, utility bills and other necessities.

However, many other tactics were used to mislead lenders:

  • 17 per cent of borrowers said they understated the value of pre-existing debt, especially outstanding credit card balances.
  • 14 per cent inflated their annual income.
  • 13 per cent overstated the value of their assets.
  • 11 per cent indicated they had applied for owner-occupier loans when they were actually buying an investment property to get a lower interest rate.

Slightly more than 30 per cent of the borrowers participating in the UBS survey refused to comment on how they had misled their lender.

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