Lenders, aggregators and brokers have hit back at accusations by consumer spokesgroup Choice that "lax" lending standards and high LVR loans are putting consumers at risk.
Tom Godfrey, spokesperson for consumer group CHOICE, told Australian Broker
some “risky” home loans being offered to borrowers have the potential to put home-buyers in financial difficulty.
“No or small deposit mortgages can get you into trouble, especially if house prices decrease or your situation changes as it can happen that you owe more than you house is worth.”
A recent article
in the Courier Mail
claimed that banks have been "loosening their purse-strings close to pre-GFC levels".
The major banks have copped accusations in recent months of lowering lending standards in an attempt to win back falling market share, but top bank executives have denied this is the case.
Westpac’s Brian Hartzer said last year there was no evidence of loosening standards, but cautioned lenders to “be alert to the possibility of things getting ahead of themselves”.
Godfrey, however, maintains many of the home loan products currently offered in the market have the potential to be damaging to consumers’ financial well-being.
“It's of concern if consumers are offered mortgages that can get them into trouble. One example of such a risky home loan is a 120% LVR mortgage offered by RAMS
- RAMS is owned by Westpac,” said Godfrey.
“If your parents or siblings guarantee your loan or even have to take out a mortgage themselves - as it is necessary in case of the RAMS loan - you endanger not only your own home but also theirs.”
The RAMS loan in question is a guarantor loan, which a RAMS spokesperson says was introduced a number of years ago through the bank’s “Fast Track” program, an option popular with first home buyers.
“It’s one option, but it’s not the only option,” said the spokesperson. “If customers are finding it difficult and parents are willing to go in as the guarantor it’s a way they can keep up-front costs down.”
The spokesperson dismissed Godfrey’s claims as misleading, stating that guarantor loans are often at less risk of default, as parents are quick to ensure their children stay on top of loan payments. The option also helps first home buyers avoid expensive LMI costs, said the spokesperson.
Otto Dargan, director of the Home Loan Experts, says guarantor loans, offered by a number of providers, do carry additional risks, but these risks can be effectively managed.
“Removing the product would be a real blow to first home buyers, particularly in expensive property markets,” says Dargan.
“The risks need to be explained to the borrowers and the guarantors, they need to investigate getting various insurance products to reduce their risk and they need to have a plan to pay down the loan and remove the guarantee as soon as possible.
“Our job is to work out which clients are suitable for these types of loans and to educate them about the risks. I think most brokers are doing this really well.”
Tim Brown, CEO of Vow Financial, agrees, adding that guarantors and LVRs are just two components of a complex credit decisioning process.
The latest figures from AFG show average LVRs have fallen slightly across the country, but this is driven mostly by an increase in investor activity. States with strong levels of first home buyer activity continue to have higher average LVRs, such as WA (71.3%) and SA (70%).
“Lax lending standards are a concern because consumers may find they are unable to re-pay the debt they have taken on,” said Godfrey.
“In the worst case scenario this can result in your home being re-possessed by the lender. From a big picture point of view, systemic lax lending practices in the US were the primary cause of the global financial crisis, a scenario we don't want to see repeated here.”
The RAMS spokesperson, however, says if anything the bank’s lending criteria has tightened in recent years.
“We have lending guidelines and credit policies and we’re not in the business of writing loans for people who can’t afford to pay. That’s not prudent for us as a business or prudent for customers so we do have a level of responsibility in our business and there are a lot of checks and balances that go into writing loans.”
Dargan agrees, stating that, while there may have been some evidence of “lax” lending standards prior to the GFC, that is no longer the case.
“If you want to go through every lending policy and find one or two that look bad then of course you can, however if you look at the types of people getting approved and declined as well as the arrears rate then you can see that the system isn't broken.”