Banks assume you can live in poverty

Some banks allow their borrowers less money than the official government poverty line in assessing their ability to repay a loan, according to a review by a team of Merrill Lynch banking analysts.

Merrill Lynch reverse-engineered the home-loan calculators used by banks – available on their websites – to work out the cost of living banks must use in assessing loans.

“Surprisingly, the average bank cost-of-living assumption is seven per cent lower than the poverty index, 14 per cent lower than our barebones budget, and even more for our adjusted [living costs, based on] ABS survey [data],” says the report.

The Merrill Lynch analysts argue in their report that the banks, using low default living costs, are able to artificially inflate the level of debt they can provide to borrowers.

Using alternative and higher levels of living costs, modelled by Merrill Lynch, the researchers found that for a couple with one dependent, a big bank’s “approval in principle” for a loan (and subject to a range of assumptions) would fall from the mid $400,000 level to less than $400,000 using what they term “normal” costs.

Source: Banking Day