Michelle Tate speaking of her family’s situation on the ABC on Wednesday night. Picture: ABC
Michelle Tate speaking of her family’s situation on the ABC on Wednesday night. Picture: ABC

Dodgy finance tool leaving Aussies in debt

AUSTRALIA'S banks have been caught fudging their numbers, using a dodgy financial tool to vastly underestimate borrowers' expenditure in order to write loans people will never be able to repay.

It's called the Household Expenditure Measure (HEM), an estimate of the bare minimum for essential living costs, along with limited discretionary spending - and borrowers are finally realising their banks got their figures wrong by using it.

Now Aussies across the country have been left with investment properties they can't afford or are being forced to sell their family homes and enter the rental market as they struggle to stay afloat and default on their mortgage repayments.

Experts have slammed the banks' use of the tool, with the person who invented it saying it was "alarming" they weren't using it as it was intended.

The HEM was not designed to be used on its own as it only estimates minimum spends and the idea was that banks would still conduct further inquiries.

But several families claim their banks never did so, not accounting for dependent children and other basic living expenses such as insurance and mobile and internet plans.

Lindsay David, founder of LF Economics, said he struggled to find any borrowers who had an annual expenditure as low as what was stated in Westpac sample data.

"If you live in a certain neighbourhood, the minimum cost of living there for you and your wife might be $32,000 a year," he said.

"That's what they would use as a minimum benchmark against your income to see what's in between.

"Let's say you earn $80,000, the cost-of-living benchmark is $30,000, there's $50,000 in between. The banks' algorithms are designed to say that you have the capacity to repay $49,999 a year to the bank, when in reality your cost of living is significantly higher."


The Tate family from Queensland are struggling to stay afloat. Picture: ABC
The Tate family from Queensland are struggling to stay afloat. Picture: ABC

The HEM is based on Australian Bureau of Statistics data.

The ABS's 'Household Expenditure Survey' for 2015-16 put the average basic household expenditure at $846 per week for 'necessary spending' such as housing, groceries, fuel, healthcare and transport.

The average discretionary spending was $579 per week for things like luxury and consumer goods.

UBS reported that in 2017, 70 to 80 per cent of all home loans in Australia used the HEM benchmark.

Earlier this year, Westpac was forced to reassure investors of the quality of its mortgage book after an APRA-commissioned review from 2017 was released by the Banking Royal Commission.

That review, conducted by PwC, described the banks' reliance on HEM as "surprising" and recommended its use as a "proxy for actual living expenses" should be reassessed.

Queensland couple Ian and Michelle Tate have been left distraught at the prospect they might lose everything because they claim Westpac grossly underestimated their expenditure.

They bought their first home in 2008 but decided to invest in a further three in 2013 and 2014 while Mrs Tate was a full-time mum, all funded through Westpac loans they locked in as interest only and secured against their first property.

Unaware the interest only period would eventually end, they've been faced with $1.6 million in debt they fear they can't afford.

The couple, who have three children, have been forced to borrow from relatives to get by and sold their home to build a new property, but Westpac won't release the funds because the home was securing the investment properties they can't cover anyway.

"We're losing it all," an emotional Mrs Tate told the ABC's 7.30 program.

The couple is considering legal action with Maurice Blackburn because they say Westpac failed to lend responsibly.

UBS analyst Jonathan Mott said the bank's sample data used "raised questions" about the quality of Westpac's $400 billion mortgage book.

"While Westpac has undertaken significant work to improve its mortgage underwriting standards over the last 12 months, we expect it and the other majors to further sharpen underwriting standards given the Royal Commission's concerns with Responsible Lending," he said in a client note.

"This could potentially lead to a sharp reduction in credit availability (credit crunch)."

Western Australia resident Gary Tahmizian said his situation had caused the worst stress he had ever experienced after claiming NAB approved an investment loan he could not afford.


Gary Tahmizian and his wife going through the mortgage documents that caught him out. Picture: ABC
Gary Tahmizian and his wife going through the mortgage documents that caught him out. Picture: ABC

Mr Tahmizian said his basic living expenses were underestimated and his three children living at home were not listed as dependants when the bank approved a loan for a unit in Newman in 2014.

"Looking at the application I thought how can they approve this? How can you live on $2000 a month?," he told the ABC.

"They put in $80,000 furniture to boost up my assets and I don't have $80,000 worth of furniture.

"It's been terrible the last few months, going through mortgage stress, it's something I've never experienced before. I wouldn't wish it on anyone else."

Mr Tahmizian took his case to the Ombudsman who later ruled NAB was not responsible for his investment decisions.

In a statement to the ABC, NAB said Mr Tahmizian had been able to afford the loan.

The inventor of the tool, Guyonne Kalb from the University of Melbourne, said she was alarmed at how it had been used since 2008.

"Every household is different so they might have particular expenditures that are unique as well," she said.

"If you give out loans you should do proper checks. I find it concerning that people would get loans they could not repay."

Westpac said it had robust processes in place to ensure it lent responsibly.