Home Loan Repayment

Australia's bad debt culture is being encouraged by the big banks, according to the top man at Virgin Money.

The recent ING DIRECT Melbourne Institute Household Saving & Investment Report indicates a rising problem with debt management, with some 7% of families using between half and all their income servicing debts, up on 5% in the previous quarter.

David Wakeley, CEO, Virgin Money, believes the big banks have to take responsibility to ensure they are not chasing and making money out of people's bad debt.

He said: "Customers trust that lenders are doing the right thing for them and managing their risk, but there are lenders out there making a mockery of it. People are getting approved for higher loan balances than they can afford, and there are unrealistic valuations and dangerous loan amounts."

Wakeley pulled no punches in his condemnation of the big banks in their "blinkered search for profit", saying they were only interested in signing people up.

He added: "We think it's an outrage that the big banks are approving people for higher loan balances than they're realistically able to repay. As a result, this is getting people into serious debt."

His biggest concern is high loan-to-value ratio (LVR) loans; some banks have begun to offer loans at 105% of the property value.

Wakeley said: "We believe there are very few people who can afford high LVR loans so there needs to be a very strict process for approval."

Concern was also expressed about common estimates on the percentage of income that should be used to service a debt. He believes using 30% of gross income to cover a loan is 'incredibly dangerous.'

"It's an inaccurate measure that doesn't take into consideration a person's situation; whether they're single or have a family, or any other costs and potential interest rate rises."

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