More people struggling with higher rates and house prices are lying on loan applications

More people struggling with higher rates and house prices are lying on loan applications
  • PublishedDecember 5, 2023

More people looking to break into the property market are lying on their loan applications — by either overstating their income or understating their expenses — in desperation to try to secure a home loan, according to new data.

Sean Quagliani, the co-founder of financial technology company Fortiro, which big banks and other lenders use to help them detect fraudulent documents, says since interest rates started rising about a year and a half ago, there has been a threefold increase in people lying on home loan applications.

“One example might be, somebody will modify a pay slip to increase the amount of income that they’ve got,” Mr Quagliani says.

“We see other examples of people removing transactions from their bank statements to only show that they might have no kids, but they have kids. People can be very creative.”

a young man sits in front a computer in a startup space
Sean Quagliani says there’s been a threefold increase in people lying on home loan applications. (ABC News: Sean Warren)

Mr Quagliani says part of the reason there has been an increase in people lying is because they face far greater financial pressure under rising interest rates, the higher cost of living and increasing house prices.

“If you put yourself in the shoes of a prospective borrower who might be trying hard to get onto the property market and put a roof over their head … it’s a decision between telling the truth to the lender, and potentially not getting access to the credit to get the property,” Mr Quagliani says.

Doctoring documents or otherwise lying on your loan application can invalidate the loan contract, resulting in a default on the mortgage, and might even land those involved in jail for fraud.

Concern over rising arrears from mortgage cliff

The data comes as the Reserve Bank on Tuesday left lift interest rates on hold at its final meeting this year.

Financial markets and economists had tipped the the central bank would keep rates on hold at 4.35 per cent in December, but are forecasting that another rate hike next year could still be possible.

Reserve Bank Governor Michelle Bullock on Tuesday said: “there are still significant uncertainties” and “whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time-frame will depend upon the data”.

Some home owners who were stuck in a mortgage prison are finding relief as banks loosen the stress tests applied for mortgage refinancing, but others are starting to miss their repayments due to financial stress.

Next year, almost half a million more Australians will hit a mortgage cliff, rolling off low fixed rates to higher variable rates, making their home loan repayments unaffordable.

Market analysts and economists expect the rates of arrears — that is, borrowers missing mortgage repayments — will shoot up over the coming months.

And there are warnings that could, in some cases, result in defaults and forced repossessions of homes later next year.

‘More opportunity’ to fabricate documents

Another reason for the threefold increase in “liar loans”, Mr Quagliani says, is that there’s more opportunity to fabricate documents due to the plethora of free tools available online.

“You’re not going to a bank and sitting down in front of anybody anymore, it’s a very sort of online digital experience … achievable in probably 30 seconds,” he says.

A young man works at a startup space
Sean Quagliani says online tools are making it easier for people to create fake documents.(ABC News: Sean Warren)

“To give one example, it’s as easy as just downloading a bank statement template that can be filled out pretty quickly on your computer using Microsoft Word.”

He picks out an example of a template that looks identical to that used by a big-four bank.

“You can either do a DIY and [the website will] give you the template, or you pay $99, and it will create it for you,” he says.

Another common approach is people using editing tools to change a PDF version of a pay slip, he says.

While lenders are becoming better at detecting fraudulent documents, it’s getting harder to fight as there are more and more online tools that enable it.

“Fighting fraud and creating a safe environment to transact around mortgages is something that never ends — it’s almost like a cat-and-mouse game,” Mr Quagliani says.

Investment bank UBS last year released a note singling out a “sustained increase in admitted factual misstatements coming from ANZ customers”.

More than half of the survey respondents (55 per cent) who took out a mortgage with ANZ in the six months prior to the survey indicated that they had made misstatements on their mortgage application.

Eighty-one per cent of the 93 respondents who misrepresented their ANZ-originated loan claim they did so on advice their banker provided in order to ensure their loan was successful.

A man in a suit on a laptop searching real estate websites.
The rise in property prices hasn’t eased despite higher interest rates.(ABC News: John Gunn)

Banks loosen stress tests for borrowers refinancing

The increase in liar loans comes as the banks loosen the tests that are applied for some people wanting to refinance their loans.

As interest rates have increased in line with 13 cash rate hikes since May 2022, it has become harder for some borrowers to refinance their home loans.

To overcome this, some lenders — including three of the big four banks — have reduced what’s known as the “serviceability buffer” for some people refinancing their loans.

Under rules imposed by banking regulator APRA, banks are required to apply buffers that assess a borrower’s ability to service a home loan at rates 3 per cent higher than those currently on offer.

This rule remains in place for new borrowers, and APRA chairman Jon Lonsdale in October said the 3 per cent buffer rate “is appropriate in the current environment”.

But when it comes to some borrowers refinancing, some lenders are applying lower buffers of 1 or 2 per cent. This is usually only for people who have a good track record of paying off their debt, a decent credit score and who are not looking to significantly increase the loan amount.

First home buyer Aleisha Watson and her partner are among that small cohort of borrowers who have been assessed at a lower buffer. She and her partner borrowed $420,000 in 2020 and refinanced their home loan in August.

A young lady looks lovingly at her cat.
Aleisha Watson has just refinanced her home loan.(ABC News: Elizabeth Pickering)

She was about to roll off the mortgage cliff, but her fixed rate of 2.14 per cent increased to a lower variable rate of 5.85 per cent for their remaining loan of about $400,000 (instead of a higher rate of 7.85 per cent) thanks to the lender agreeing to a lower serviceability buffer.

“We realised that we were in a really precarious situation because we still had the entirety of the value of our loan outstanding, rather than people who have been in the market 10 or 15 years that have paid some of their home back.

“We just wanted to be just that little bit step ahead, just in case we ever got to the point where it became unattainable.”

When they first borrowed in 2020, the broker offered the couple $950,000 in financing but she was advised by her mother, who is an economist, not to take it in case interest rates rose.

“We considered their offer and mum said don’t you dare … you won’t be able to afford it if rates go up,” she says, relieved that she took her mother’s advice.

“No way on earth would we be able to afford almost a million dollars right now, we would be homeless, pretty much.”

A picture of a house with a sale sign at the front.
Data is beginning to show the rates of arrears, or borrowers missing repayments, has begun to rise.(ABC News: James Carmody)

Almost half a million Australians yet to roll off mortgage cliff

But not all Australians are as lucky as Ms Watson. Many are about to hit a mortgage cliff and are struggling to refinance. 

RBA data shows there were 590,000 mortgages that came off fixed rates last year, 880,000 who came off (or will come off) fixed rates this year, and 450,000 who roll off next year.

RateCity’s research director Sally Tindall says banking regulator APRA made a mistake by having a low buffer for new home loan borrowers until October 2021, when it lifted it from 2.5 per cent to 3 per cent.

APRA had previously dropped a minimum floor of 7 per cent on its serviceability test in mid-2019, allowing customers to borrow more.

A lady in a bright orange top stands in an office smiling
Sally Tindall wants the financial regulator to change the stress tests when people refinance. (ABC News: Daniel Irvine)

This happened after hundreds of thousands of people borrowed six or more times their income on deposits of less than 10 per cent

“Unfortunately, with the benefit of hindsight, we can now say that that was way too low,” Ms Tindall says.

“APRA increased the buffer to help cover this risk, but the reality is, a lot of people at that time borrowed the maximum amount their bank would lend to them. And now as a result of that low stress test, they’re now over their heads in debt and in financial hot water.”

Ms Tindall says there’s a limited pool of those able to refinance their home loans and get rate relief.

She says for people refinancing their home loans (not new borrowers) the buffer should be lowered to 1 per cent.

“It’s quite confusing for a borrower looking to refinance or work out exactly which bank might lend to them, and which won’t,” she says.

If they took out a 30-year loan in October 2021 with a big-four bank, they could have borrowed an estimated $688,800 on an average variable rate of 2.69 per cent.

That is the estimated maximum amount the bank would let them borrow at that point in time, when the APRA buffer was 2.5 per cent.

Fast forward to today, they would have a remaining debt of $664,777 and be earning an estimated $95,607 (based on the ABS average weekly ordinary time earnings for May 2021 and May 2023).

Assuming they have not negotiated, their rate will have risen to 6.94 per cent, and their repayments will have risen from $2,790 to $4,500 — a 61 per cent increase.

RateCity.com.au estimates a competitive rate after this latest hike filters through will be 6 per cent. However, this borrower is unlikely to be able to refinance to this rate, as they will not pass the bank’s stress tests.

With an annual salary of $95,607, even when moving to a lower rate of 6 per cent, their estimated maximum borrowing capacity would be just $507,800 — that’s over $150,000 short.

Even when stress testing the person’s finances with a reduced buffer of just 1 per cent, they are unlikely to pass their bank’s new serviceability test, although it notes this could vary from lender to lender.

How much rate relief could refinancing bring?

Using the same example, if this borrower did manage to refinance from their rate of 6.94 per cent to a rate of 6 per cent, after the November hike takes effect, they would see their monthly repayments drop by $402.

Refinancing can make a big difference in the short term
RateMonthly repaymentCost (next two years)
Do nothing6.94 per cent$4,500$91,178
Refinance6.00 per cent$4,099$79,814
Difference-0.94 per cent-$402-$11,365
Source: Ratecity.com.au. Based on an owner-occupier taking out a loan in July 2021 at a rate of 2.60 per cent. Does not include future rate hikes. Includes switch costs.

Over the next two years, they could save around $11,365 from refinancing, even when $1,150 worth of switch costs are factored in. (This does not include any future rate changes in that time.)

Melbourne-based mortgage broker Philip Robertson also thinks the regulator needs to lower the buffer for those refinancing their loans.

He says a small number of his clients are refinancing on lower buffers of 1 or 2 per cent, but that most do not qualify.

That, he says, leaves many trapped and thereby they are more likely to take on riskier personal or business loans.

“There’s a lot of credit card debt out there,” he says.

A man sits at his computer.
Philip Robertson says it’s becoming harder for people to refinance their loans.(ABC News: Sean Warren)

“There’s a lot of unsecured business loans, short-term loans, there’s payday lending, there’s, you know, all sorts of delaying tactics that you can use — borrow money from friends and family, that sort of thing.

“Their situation and their circumstances will be so much better if they were able to perhaps go interest-only for a short time [or] change to a lender who had a low rate. That will relieve a lot of stress, especially on people who are more vulnerable, or lower-income people.”

Data shows the rate of arrears — borrowers missing mortgage repayments — is starting to rise, which will in some cases result in defaults and forced repossessions of homes.

The APRA Quarterly Property Exposure Statistics for September show just 0.54 per cent of total credit outstanding is between 30 and 89 days past due, while 0.80 per cent of credit outstanding is classified as “non-performing” (that is, loans that are impaired or 90 days past due).

Owner occupiers are over-represented in the share of non-performing loans.

Percentage of non-performing loans
Loan typeSeptember 2023September 2021
Owner-occupierAll0.79 per cent0.87 per cent
InvestorAll0.73 per cent0.94 per cent
Owner-occupierInterest only0.61 per cent0.88 per cent
InvestorInterest only0.31 per cent0.43 per cent
Source: RateCity.com.au, based on APRA Quarterly Property Exposure Statistics, September 2023.

Mr Robertson fears that if things are not made easier for people who need to refinance, it could lead to “a massive amount of wealth inequality”.

“If you’re going to block access to some groups of society … over some regulatory umbrella, then I think that’s an issue,” he says.

APRA has indicated its latest update on macroprudential policy, including the serviceability buffer, will be released in the next few weeks.

Its chairman, John Lonsdale, has not talked publicly about buffers for those refinancing, but did indicate in a speech in October that 3 per cent remains “appropriate in the current environment” for new home loan applicants, and that “as always, these settings are under constant review”.

Westpac senior economist Matthew Hassan says from the bank’s perspective, the buffer is only available for a small number of borrowers refinancing with a good track record.

A man in a suit looks concerned.
Matthew Hassan says only people with a good track record with the bank are able to refinance under lower stress tests. (ABC News: Daniel Irvine)

“These policies are really approached on a case-by-case basis, and what they’re aimed at is helping borrowers who are stuck in a difficult situation where they’re unable to refinance, given the sharp rise in interest rates over the last year,” he says.

“In most cases, they’ll be very good borrowers that would have made their repayments and they are well placed in terms of other aspects of their finances and in specific circumstances.”

Are more repossessions on the horizon?

With market expectations that there may be another rate hike in February, the chance that home repossessions by banks could rise is possible.

Mr Hassan says there is typically a six-to-nine-month delay between extreme rate rises and associated signs of mortgage stress.

“A key question mark is the extent to which we start to see some weakening in the labour market,” he says.

“If there are some job losses, then that will tend to see arrears push higher as well. That will flow through over the next 12 months. And to the extent that that then flows through to mortgages and possessions, that’ll tend to be the back end of next year.”

He thinks rate cuts are possible by late 2024. But that seems far away for borrowers like Ms Watson.

Even with a more competitive variable interest rate, she still fears what could happen if there are further interest rate hikes.

a young lady in her new home
Aleisha Watson took on less debt than she was advised to. (ABC News: Elizabeth Pickering )

The couple are already making cuts to spending and asking questions like: “Do we need medication? Do we need to have, you know, surgeries that we require?”

“We have to consider how much electricity we’re using, how much water we’re using, how much food we’re using,” she says.

“We have a compost bin that we use to put any of our unused food … the bin rarely gets any additions.”

She says the couple have considered the worst-case scenario: the possibility of selling their home if things get too tight.

SOURCE: ABCNEWS

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