Joint loans represent a growing market trend, but their performance characteristics are unique — something that appears to have been largely overlooked in the industry. Historically, lenders have used a variety of practices when evaluating and pricing these applications, which may result in gaps or inefficiencies when determining risk.
New research from TransUnion is leading to a better understanding of the joint-loans market, and both consumers and institutions stand to benefit. Matt Fabian, Director of Research and Consulting at TransUnion Canada, provides guidance on establishing practices to help lower risk and capture new opportunities.
The rise in home values across Canada combined with stricter qualifying rules have resulted in increases in co-borrowing and the issuing of joint loans. It’s not only couples who are applying for mortgages together: parents and even grandparents are also stepping in to support younger family members in purchasing property — a trend appearing to be on the rise.
A recent TransUnion study found the number of mortgages issued to the Silent Generation (aged 73 to 93) was up by a significant 63%1. For Baby Boomers (aged 54 to 72), the increase was 18%. Helping younger family members get into the property market by co-signing on their mortgages may explain the increases among these groups. Faced with increasing property prices and increasing interest rates, younger generations are also more likely to ‘buddy up’ and buy a home with a friend to start their home owning journey.
Co-borrowing is increasing for a variety of credit products, from mortgages to auto loans. According to TransUnion’s data, joint loans make up one-quarter of all loan originations and present significant opportunities to lenders. As shown in Figure 1, co-borrowing accounts for over half of all mortgage originations and is growing steadily, up from 57% in 2013 to 60% in 2017.
Figure 1: Annual joint loan originations for key products, 2013 to 2017
Origination values tend to skew higher for joint loans than individual loans. The total market value of mortgages originated as joint loans is 60% higher than for individual loans. This makes sense, as it’s often couples that use their dual income to purchase a property they wouldn’t be able to afford individually. However, this trend extends to other areas of credit, too.
The average origination amount of joint auto loan accounts in 2017 was 12% higher than for individual accounts, and up from 8% in 2013. For lines of credit, it was even higher: in 2017, average origination amounts on lines of credit were 225% higher for joint borrowers than individuals, up from 147% in 2013.
Despite the market’s large size and high value, there does not appear to be a best practice used across the industry to evaluate joint loans. Different lenders often evaluate joint loan risk in different ways. Some use the lowest individual credit score in the group of joint loan applicants; others use the highest. Some will average the credit scores of joint applicants.
Things are seldom what they seem: joint loan performance is counterintuitive; individual consumer behaviour in joint loans appears to be less predictive of true co-borrower risk.
This variability points to a potential problem: lenders may not have a clear enough understanding of the potential risk on a joint loan, leading to incorrect pricing or missed opportunities with consumers. A recent TransUnion analysis of 6.9 million consumers found joint loan performance is counterintuitive, and should not be based on individual consumer behaviour alone. Even super prime consumers did not behave as expected in joint loans.
Our analysis showed three conventional — and seemingly logical — approaches to evaluating co-borrowers (using highest, lowest, or combined credit scores) were not the most efficient predictors of credit behaviour on a joint loan. Lenders that use these methods should consider implementing a different approach to assessing risk on joint loans to avoid taking on unnecessary risk, pricing incorrectly and even losing business.
Learn more about TransUnion’s solutions
The joint-loan market is large (and growing), presenting value for lenders. TransUnion has developed a co-borrower score matrix to provide lenders with a clearer view of potential performance on a joint loan, based on product type and individual portfolios. This new approach helps lenders to better assess incoming opportunities while reducing risk.
Attend our webinar on April 11th, 2 pm ET to learn more.
Uncover deeper insights into joint loan performance