UBS survey suggests a third of interest-only borrowers don’t understand their loan but the reality is more complicated
UBS survey suggests a third of interest-only borrowers don’t understand their loan but the reality is more complicated
A survey by UBS has claimed that one-third of interest only borrowers do not realise they have an interest-only loan.
The claim forms part of a report into the problem of ‘liar loans’, asking recent borrowers whether they misstated their income or expenses. UBS warn that interest-only borrowers that misstated details are particularly likely to be under high financial stress; 41% of misstating borrowers, compared to 21% of those who say their applications were factually accurate.
More than half of borrowers under financial stress would reduce their spending or consumption, rather than consider switching to P&I loan, UBS found. However, 23% would consider selling their latest property, with UBS arguing that banks’ profits could eventually be hit as a result.
UBS also claimed that borrowers who had taken out an IO loan with a broker were more likely to be under high financial stress than those who’d used a bank.
Flawed methodology
UBS’ claim that one-third of IO borrowers don’t understand their loan suffers from serious methodological issues.
The claim itself is an assumption, not a fact. UBS’ survey recorded a lower proportion of IO borrowers than APRA’s figures, 23.9% compared to 35.3%. Rather than see this as a problem with their sample, or choice of questions, UBS claims that the discrepancy is due to IO borrowers not realising they are IO borrowers.
However, UBS provides no further evidence to suggest this is the case. Their findings are also potentially undermined by a small sample size – 907 people took the survey, of which 217 were interest-only borrowers. Once divided further between broker and bank customers, and between misstating and accurate applicants, the numbers become smaller still.
Financial literacy or lack thereof
UBS suggests that low financial literacy in Australia contributes to IO borrower ignorance, but this claim is also questionable.
UBS base their claim on a two-year-old survey by ME bank. A more recent survey of Australians by ME suggests there are problems; 74% didn’t know what a comparison rate is and 64% didn’t realise that reducing the length of a loan reduced their mortgage repayment. In their recent survey, ME did not ask about interest-only loans, however.
Furthermore, IO borrowers are not necessarily your ‘average Australian’. In September 2016 an ASIC report into mortgage brokers and IO borrowing found that 83% of investors and 78% of owner-occupiers who entered into interest-only home loans earned in excess of $100,000 per year, significantly higher than for P&I borrowers.
A survey by UBS has claimed that one-third of interest only borrowers do not realise they have an interest-only loan.
The claim forms part of a report into the problem of ‘liar loans’, asking recent borrowers whether they misstated their income or expenses. UBS warn that interest-only borrowers that misstated details are particularly likely to be under high financial stress; 41% of misstating borrowers, compared to 21% of those who say their applications were factually accurate.
More than half of borrowers under financial stress would reduce their spending or consumption, rather than consider switching to P&I loan, UBS found. However, 23% would consider selling their latest property, with UBS arguing that banks’ profits could eventually be hit as a result.
UBS also claimed that borrowers who had taken out an IO loan with a broker were more likely to be under high financial stress than those who’d used a bank.
Flawed methodology
UBS’ claim that one-third of IO borrowers don’t understand their loan suffers from serious methodological issues.
The claim itself is an assumption, not a fact. UBS’ survey recorded a lower proportion of IO borrowers than APRA’s figures, 23.9% compared to 35.3%. Rather than see this as a problem with their sample, or choice of questions, UBS claims that the discrepancy is due to IO borrowers not realising they are IO borrowers.
However, UBS provides no further evidence to suggest this is the case. Their findings are also potentially undermined by a small sample size – 907 people took the survey, of which 217 were interest-only borrowers. Once divided further between broker and bank customers, and between misstating and accurate applicants, the numbers become smaller still.
Financial literacy or lack thereof
UBS suggests that low financial literacy in Australia contributes to IO borrower ignorance, but this claim is also questionable.
UBS base their claim on a two-year-old survey by ME bank. A more recent survey of Australians by ME suggests there are problems; 74% didn’t know what a comparison rate is and 64% didn’t realise that reducing the length of a loan reduced their mortgage repayment. In their recent survey, ME did not ask about interest-only loans, however.
Furthermore, IO borrowers are not necessarily your ‘average Australian’. In September 2016 an ASIC report into mortgage brokers and IO borrowing found that 83% of investors and 78% of owner-occupiers who entered into interest-only home loans earned in excess of $100,000 per year, significantly higher than for P&I borrowers.
