The term “lying loan” has become synonymous with the housing bubble and the collapse of the market in the 2000s. And although we would like to believe that these loans do not exist in Canada, the reality is different. So, what is a “lie loan”? How does this affect the Canadian economy? And why would anyone want to get this kind of loan? The next reading will give you answers.
What is a “lie loan”?
A lie loan is when either the borrower, the loan broker or the lender lies about the potential income of the borrower. This is a “lie loan” because someone lied. Contrary to what you might think, some mortgages do not require a lot of checking. These are loans with little or no documentation required. The borrower’s approval is based primarily on his credit rating and payment history. Since these loans do not require much documentation, people take advantage of this and exaggerate their current income.
Potential borrowers lie about their real income and the amount of property they own in order to get bigger loans and buy the house that they otherwise would not have bought. In addition, it is known that lenders and loan brokers often overlook these differences (between reality and lies) in order to obtain their commissions.
Loan based on your income
Any mortgage that is solely based on your income (loan with little or no documentation) are false loans. Because of their lack of verification, these loans often allow false loans to be approved.
In this kind of loan, the borrower is only asked to provide his income which, worse still, is not even verified. This opens the door for abusive borrowers who will lie about their income in order to get an even bigger amount.
Ready with little or no documentation
Be aware, however, that not all loans with little or no documentation are false loans. In the case of lying loans, the lender will sometimes not even ask for income or property in the hands of the borrower.
Why would a borrower want a lie loan?
After this reading, you may be wondering why would someone want to have a lie loan? Although everyone has their reasons, the majority of people do so to be able to buy a more expensive home or to buy what they want but can not normally afford. However, some trends can be observed:
- The borrower does not have enough income to buy the house he wants
- The borrower tries to hide his real income from his spouse or the government
- It is in the interest of the borrower to lie in order to obtain better repayment terms
There are several reasons why no one should opt for these loans, but the most important reason is the long-term consequences. When someone is lying on his income in order to get a loan that he / she can not really afford, he / she makes a bet with the future, an uncertain and unpredictable future.
- A job loss, health problem or any other emergency can prevent you from repaying the loan in the future. Once this happens, the person realizes the size of his loan and can not pay it.
- People are often advised to refinance their mortgage in the future. But what happens when these people make important financial decisions in the hope that they will be able to refinance their mortgage or use the residual value to repay the debt? Imagine that the real estate market is falling and the house is not even worth the price of its purchase.
As a result, the real estate market is becoming a mess, thousands of people are no longer paying off their mortgages and more people are left with more loans and fewer resources to pay them back.
The current risk
In 2015, the Bank of Canada made it clear that the biggest risk to the Canadian economy is growing household debt. One thing we can be sure of is that the future is unpredictable, especially for those who rely too much on credit.