Fraud in Australia’s mortgage lending system
There's more than meets the eye when it comes to mortgage lending standards, as banks reportedly breach their duty of care to home loan customers.
A report from Mortgage Business reveals that home loan fraud is prevalent in the financial system, with two Australian economists claiming that lenders have breached a duty of care to home loan customers in an effort to secure higher profit margins.
LF Economics’ Lindsay David and Philip Soos believe that home loan fraud coupled with the lowering of lending standards threatens the stability of the nation’s financial system.
“The banks have trashed their lending standards over a prolonged period of time with significant evidence of banks massaging people’s incomes in their loan application forms to make them look a lot more creditworthy than what they are, which is essentially fraud,” Mr David told the ABC.
It is believed that lenders do this in order to gain new clients, to cover higher administrative and funding costs, and to boost profit margins.
Last year the Australian Prudential Regulation Authority (APRA) imposed stricter lending criteria by requesting deposit-taking institutions to curb investor lending to below 10%. It also lowered the loan-to-value (LVR) ratios and abolished several home loan discounts and promotions.
In response to higher funding costs, several lenders have begun raising interest rates out-of-cycle, while others have turned to unethical practices by approving home loan customers that may not be in a sound financial position to service a mortgage.
“If you show that your borrowers are very creditworthy, then you are going to get cheaper funding costs and that's a win-win for the bank...”, Mr David says.Back to top
Not only does this breach a duty of care that financial institutions have to only provide suitable finance products, but it may also harm the financial health of Australians who may encounter mortgage stress as a result.
In its Financial Stability Review, the Reserve Bank observed the actions of industry regulators which have helped tighten mortgage lending standards.
“In particular, the share of high loan-to-valuation lending has taken a noticeable step-down and tighter serviceability metrics have reduced maximum loan sizes,” the RBA said.
If you’re unsure about your affordability or serviceability potential, make sure that you do your due diligence by seeking professional help. Speak to several experts including mortgage brokers, lending specialists, and accountants to ensure that you can comfortably repay a mortgage.
Additionally, if you believe that a broker or a lending specialist has a conflict of interest, then don’t be afraid to ask for a second opinion.
It’s advised that you keep at least $10,000 - $15,000 or the equivalent of three months of mortgage repayments in an offset account to serve as a contingency buffer for a "rainy day".