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What's the problem: liar loans ...

What's the problem: liar loans or financial illiteracy?

A lack of financial literacy among Australian property buyers is leaving many with mortgage loans that they do not understand and are not necessarily in the best position to repay.

This is according to a new report from the UBS banking team, which found that a worrying number of homeowners do not know they have an interest-only loan or know what this involves.

Their research followed recent controversy over so-called liar loans, a term which refers to assets being overstated in order to secure finance, suggesting mortgage applications are filled out and approved inaccurately.

UBS found that even though statistics show more than one-third (35.3 per cent) of homeowners in Australia have an interest-only mortgage, under one-quarter (23.9 per cent) said they did when asked.

But are they lying? Or simply unaware of the type of mortgage they have due to a lack of knowledge?

Jonathan Mott, an analyst at UBS, commented: "Although this may seem far-fetched, it needs to be considered in the context of the lack of financial literacy in Australia.

"A more plausible explanation is that around one-third of interest-only customers do not know or understand that they have taken out an interest-only mortgage."

UBS also drew on recent data from a survey carried out by ME Bank which highlighted Australians' financial illiteracy. It found that 60 per cent of property owners in the country cannot pass a basis financial literacy test, with more than one-third (38 per cent) admitting to having no understanding of interest-only loans.

This research comes as the Australian Securities and Investment Commission (ASIC) announces it will be conducting a review into interest-only mortgages throughout the country in order to ensure customers are not being mis-sold or misled when they are taking out a home loan to find the root of the problem.

Peter Kell, deputy chair of the ASIC, warned: "There are no excuses for lenders and brokers not meeting their legal obligations."

All information provided is of a general nature only and does not take into account your personal financial circumstances or objectives. Before making a decision on the basis of this material, you need to consider, with or without the assistance of a financial adviser, whether the material is appropriate in light of your individual needs and circumstances. This information does not constitute a recommendation to invest in or take out any of the products or services provided by SMATS Services (Australia) Pty Ltd or Australasian Taxation Services Pty Ltd.

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