What happens if you lie on your home loan application?

A growing cohort of borrowers are putting their financial future at risk, with recent research finding more than a third of home buyers lied on their loan application.

A survey by investment bank UBS asked 903 Australians who had taken out a mortgage in the 2018-19 financial year whether they were “completely factual and accurate” on their applications.

It found “liar loans” are on the rise, with 37 per cent of home buyers admitting they weren’t truthful, increasing from 32 per cent in the previous financial year. These were home buyers who overstated their incomes or understated existing debts or living costs.

Those who had bought more than one property in the financial year were most likely to have lied on their loan applications, with two-thirds of that group admitting they had fudged figures.

About half of borrowers with two or more investment properties lied, as did half of borrowers who’d had their mortgage rejected.

Liar loans were more likely to come via mortgage brokers. About 40 per cent of home buyers who lied on their application used a mortgage broker, while 27 per cent of untruthful applicants went through banks directly.  

Many respondents noted that their broker suggested submitting an application that was not completely factual and accurate.

But if you’re untruthful on your home loan application, does it really matter?

While a huge number of borrowers may have got away with inaccurate applications in the past, the risks of lying are high, and changes to the way home loans are assessed could soon put an end to the practice.

What happens if you lie on your home loan application?

If a home buyer lies on their home loan application, chances are nothing will happen to them straight away.

Chief executive of mortgage brokerage Loanworx Pauline Ryan said the only way she conceived borrowers could get caught out fibbing on their loan application once they had secured a loan was if they couldn’t pay it. 

“If the clients went into hardship, then it’s a full-on investigation into who did the loan,” she said. “Did they follow the legislation? If they didn’t, then the broker or the lender could be in serious trouble.”

While this may seem like an unlikely scenario, the UBS research found that, “worryingly”, 22 per cent of borrowers who said they had been factually inaccurate on their applications had missed a mortgage payment, compared to 6 per cent of honest borrowers.

A key issue is that many buyers are fibbing on their applications so they can take out bigger loans than they would normally be approved for, potentially biting off more than they can chew. 

Canstar group executive of financial services Steve Mickenbecker said loan contracts often included a requirement of full disclosure. 

“If you’ve lied, then technically you’re in breach,” he said. “That can give the bank the right to call up the loan.

“If the loan is otherwise being serviced in the appropriate manner, the bank is unlikely to even look at the loan. They won’t find out.”

Untruthful borrowers could also be caught out when refinancing, Mickenbecker said.

“When you make another application they could well find that you’ve hidden something,” he said. 

Mickenbecker warned untruthful applicants would be caught out very soon with the transition to comprehensive credit reporting and open banking underway.

“It’s going to be harder to lie about your income, hide loans that are in existence, and expenses,” he said. 

What’s the problem with liar loans?

Monash Business School associate professor in economics Mark Crosby said liar loans weren’t posing a problem for the economy now, but that could change if conditions worsened.

“The obvious issue is if interest rates or unemployment go up,” he said. “The more home buyers are stretched, the higher their debts, the less their offset accounts hold. That creates a risk for the financial sector.”

However, he said Australia had no risk of experiencing a housing crash brought on by issuing home loans to people who couldn’t afford them, a factor that contributed to the US subprime mortgage crisis a decade ago.

“Look at the US in 2008 – people could deduct their mortgage interest for tax purposes, meaning people had no incentive to pay off their housing loan,” he said.

“In Australia, most people understand that the best thing you can do is pay off your mortgage as soon as you can.”