Up to a third of Australian mortgages could be "liar loans" based on factually inaccurate information, investment bank UBS has warned.
The latest detailed survey of more than 900 people who took out a home loan in 2017 has found that only 67 per cent responded that their mortgage was "completely factual and accurate", down from 72 per cent of 2016 borrowers.
The vast majority of the mistruths appear to be white lies rather than total porkies, with a quarter of 2017 survey respondents saying their loan application was "mostly factual and accurate". Only 8 per cent admitted to their information being only "partially factual and accurate", and 1 per cent refused to say.
If anything, UBS believes its survey would understate the prevalence of mortgage misrepresentations as some people would be nervous about admitting it, even anonymously.
"It is highly unlikely respondents would have stated that they misrepresented their mortgage application when in fact they were truthful," the bank noted in the report.
Given the average turnover of home loans in Australia, UBS has estimated that around $500 billion worth of outstanding home loans contain misstatements about incomes, assets, existing debts and/or expenses.
With just under $1.7 trillion of mortgage debt outstanding, that means home loans based on inaccurate or fraudulent information account for 29 per cent of the total, and 18 per cent of all private sector debt in Australia.
The most common lie was understating living costs (30 per cent), while understating other debts or overstating income or assets each accounted for around 15 per cent of misrepresentations.
Given that the average scale of the misstatement across income, expenses, assets and living expenses was between 10-12 per cent, UBS has warned that it makes Australia's banks even more vulnerable to a housing downturn than most people think.
"This survey suggests many people have come to take house price inflation as a given and are prepared to be factually inaccurate on their mortgage application to ensure they get access to housing leverage," UBS warned in the report.
The investment bank has an "underweight", or sell, rating on Australian banks and has warned that loan losses may be bigger than expected given that many borrowers are in a much weaker financial position than the banks and regulators believe.
That would lead to even worse consequences for the Australian economy than policymakers expect if the housing market turns down.
UBS also warned that the banks may be vulnerable to litigation if home prices stop rising and over-indebted customers start defaulting.
It argued that more needs to be done by the banks to verify loan applications, starting with a requirement to see lodged tax returns.
ANZ had the highest proportion of mortgages that were not "completely factual and accurate", with 45 per cent falling into the investment bank's category of "liar loans", a term borrowed from the US subprime mortgage crisis.
That was significantly above the industry average of 33 per cent, as was NAB's level of loan approvals that contained misrepresentations or inaccuracies.
ANZ's chief executive Shayne Elliott told investors at its most recent quarterly profit update that it was growing owner-occupied lending "much faster than the market" and was "really comfortable with that".
All four major banks recorded a much higher level of dodgy mortgage approvals than the rest of the financial sector (at 23 per cent).
Loans taken out through brokers had a much higher rate of misrepresentation than those who applied directly through a bank (39 per cent less than wholly truthful, versus 25 per cent).
Worryingly, 37 per cent of borrowers who got their loan through a broker and lied on the application said it was at the broker's suggestion — only 8 per cent of bank customers said it was a banker who suggested lying.
Also concerning for regulators would be the 46 per cent of customers who thought their latest loan application was easier than previous ones, versus only 17 per cent who thought it was harder.
The bank regulator APRA has asked banks to tighten their loan tests to ensure financial stability, but the survey shows that loan verification practices appear to be virtually unchanged in terms of documentation required.
UBS also broke down its numbers by state. Perhaps unsurprisingly, the nation's two most expensive property markets, New South Wales and Victoria, were also the ones with the highest rate of less-than-honest mortgage applications.
A third of New South Wales and ACT borrowers fudged at least some figures on their loan application, while 31 per cent of Victorians and Tasmanians did likewise.
Western Australia had the same rate of inaccuracy as Victoria, while around three-quarters of South Australians, Queenslanders and Northern Territorians were totally honest in their loan documents.