Broker clients “slightly more likely to default”

by Miklos Bolza26 Oct 2016
Whether a borrower uses a first or third party channel is a factor that influences the probability of mortgage default, according to the latest analysis by Digital Finance Analytics (DFA).
 
Following on from his analysis on Monday (24 October), Martin North, principal and founder of DFA said that clients who use a mortgage broker are “slightly more likely to default”.
 
North found that 1.71% of bank clients defaulted on their loans compared with 1.93% of those opting for a broker.
 

 
“We think there are a number of factors below the waterline here which explains the differences. For example brokers know where to look for the larger loan, can help position the application for approval, and households choosing to use brokers are often after a bigger loan on the same income, compared with those via a branch.”
 
Looking at loan to income, DFA found that those putting more than 60% of their income to repay their mortgage faced the highest risk.
 

 
“As the LTI reduces, so does the risk. We think the LTI and DSR ratios should become the cornerstone of mortgage underwriting. APRA please note!” he wrote.
 
Finally, loan to value ratios also affected the risk of default although not through a straightforward relationship. Those in the 50-70% LVR bands were the least likely to default. The risk increased for the lower bands due to constrained incomes plus. Higher bands were also at risk due to larger loans relative to income as well as lower net assets held.
 

 
Other points of interest include that borrowers with interest-only loans are slightly more likely to default and that those under 30 and over 60 years old are more at risk.
 
Related stories:
 
Mortgage default rates expected to rise
 
Mortgage arrears at three year high: Moody’s
 
Risk of mortgage defaults on the rise

COMMENTS

  • by 26/10/2016 10:28:06 AM

    Conclusion appears inconsistent with statements made by NAB Broker for example regarding the quality of clients originated through the broker channel.

  • by 26/10/2016 10:37:03 AM

    Can we just draw a line ion the sand and before giving this guy publicity get the full details of his surveys. What questions were asked to whom or who supplied what information to him, in making these conclusions.

  • by dont walk run 26/10/2016 11:01:33 AM

    How about they go and actually look at the loan books, oh that's right no-one is going to let them. I came out of a Big 4 and at the end of 2015 they did the analysis to find out that 3rd party introduced loans had a LOWER arrears/default ratio than self generated business! Why because self generated business could be internally disputed and reworked time and time again so deals that no introducer could get approved, would get approved. Lets get the truth out there, the Big 4 bank's are trying everything to stop the bleed of clients to the broker market - except invest in quality staff with sufficient support, which is the main reason clients are walking, no running, away from the traditional banks.