Interest-only home loans a ticking time-bomb, warns UBS

"Up to a third of borrowers with interest-only loans may not realise they have them, UBS has warned in a stunning finding from its survey of recent borrowers.

The anomaly was that the bank regulator APRA's data showed that more than 35 per cent of new loans over the past year had been interest-only, but only 24 per cent of survey respondents told UBS they had taken out an interest-only loan.

Initially, UBS thought it must be a sampling problem with their survey, but the chances of this producing such a big difference were just 0.1 per cent.

That led the bank's analysts to the shocking conclusion that almost a third of interest-only (IO) home loan customers might not realise they have taken out that kind of mortgage."
​

Thousands unaware they have interest-only home loans: UBS

Is it possible that up to a third of interest-only borrowers do not know they have interest-only loans? This seems impossible to me.

1) if you read your loan docs, it will clearly state that a loan is interest-only

2) if your read your bank statement, you will see your loan balance is not reducing.

I accept that many people don't read their loan docs but do that many people not read their bank statements?

It seems to me like UBS is guessing and have got it wrong. Surely.

 

Yes, it is odd - how could you not know you have an interest only loan?

 

I wonder who paid UBS to get their high school summer holiday interns to write these half baked reports?

 

I think UBS has an agenda here. They're in the position where they could make gains from a downturn in the housing market.

As to people not knowing if they've got an interest only loan, that wouldn't surprise me at all. Most of the population (including investors) are quite clueless about finance, gearing, etc. These people may have had their loan fully explained, made a conscious and informed decision, but a year later they're completely clueless as to what's really happening. There's plenty of posts on this forum that indicate peoples ignorance of their own finances, but at least they're trying to educate themselves.

 

Wouldnt the fact your principal balance hasnt moved be some clue to the type of financial product you are holding!??

 

Actually it's their chief economist. Sample size of ~1000 ppl in the survey.

 

Chief Economist or not - they are hardly ever correct. Just like the weatherman is hardly ever correct.

 

Never overestimate the intelligence of the masses. Not surprised at all by the ignorance regarding loan types.

The data regarding Prices vs Building approvals is interesting though.

Eg
Perth - Approvals down, and prices turning up
Sydney - Approvals up, and prices turning down.

Apartment completion numbers will peak in Melb / Syd in mid 2018, so we can expect to see strong supply, particularly in inner city . . . for a while yet.

 

Of course, that's why its called speculation!
They are just communicating the results of a survey with some data analysis thrown in . . . oh and they happen to be negative on property prices...

What sort of witchcraft is this? Burn them at the stake for being negative on Sydney!

 

True, I remember reading a lot where people didn't know they signed x-coll loan docs without reading or understanding them but I don't remember any where the people didn't know their loan was interest-only. That is a whole level of ignorance I hope wouldn't be common here.

 

Only if you read your statement. Apparently people aren't even doing that!

 

That's if the methodology is reliable. Looking at how they worked through the data, the conclusion seems like a total guess.

 

they need to compare apples with apples... but they compare a number of loans with a number of borrowers.

it's likely that a borrower with multiple properties has same loan type (IO) for all loans, but a borrower with single property has P&I

Example: there are only three borrowers:
Borrower 1: P&I - 1 property
Borrower 2: P&I - 1 property
Borrower 3: IO for 2 properties

Number of loans with P&I = 50%
Number of borrowers with P&I = 66%

 

Good pickup. That is definitely a flaw with the methodology.

 

How so?

 

They're an investment bank. They could be shorting the major banks, or the Australian dollar. Both of these would be impacted by a property downturn.

 

100%...UBS has had underweight/underperform ratings on Oz banks for years!

 

Reading and understanding are two different things.

 

Are there really that many people who can't understand a bank statement? I don't think so.