‘Archaic’ lenders mortgage insurance rules hurt borrowers

Experts warn the rigid and archaic lenders mortgage insurance (LMI) rules could prevent borrowers from getting the best deal on their home loans, calling for banks to allow the coverage to be transferred between lenders.

LMI is required by lenders when the amount borrowed for a mortgage exceeds 80 per cent of a property’s value. The insurance is designed to protect the lender if the borrower is unable to meet their repayments, and the property is sold for less than the mortgage balance.

Lenders mortgage insurance can cost tens of thousands of dollars and is unable to be transferred between lenders.Credit:

The LMI premium is passed on to the borrower as an upfront cost, and can be tens of thousands of dollars, though some lenders allow borrowers to add the cost to their mortgage principal and repaid monthly.

However, despite the exorbitant costs, borrowers are unable to move their LMI between lenders, requiring them to cough up again for new insurance if they switch their home loan to a different lender.

With interest rates rising rapidly, this can lead to situations where homeowners may want to refinance but are unable to afford the cost of new LMI, effectively trapping them into staying with their existing lender.

If they are with a big-four bank, this could see borrowers paying interest rates upwards of 1.7 per centage points higher than smaller, competing lenders.

Peter Marshall, banking expert at financial literacy site Mozo, said the LMI rules are archaic and should be reviewed.

“This insurance was set up a long time ago, and given that people these days now need to borrow large amounts for their mortgages, it’s important they be able to shop around and switch to get better rates,” he said. “If LMI could be made to be transferable, that would make the refinancing process easier and a lot cheaper.”

Marshall also said the number of LMI providers are limited, with major insurers Genworth and QBE taking the lion’s share of the market. More providers would improve options for borrowers and could lead to lower costs.

Daisy Stevens, head of lending operations at Finspo says there are a few things borrowers can try.

However, for borrowers who want to refinance but don’t want to pay for LMI again, there are some options to try before striking up a conversation with a new lender says Daisy Stevens, head of lending operations at digital mortgage broker Finspo.

“Firstly, you can go to your existing lender and see if they would pass on a lower interest rate,” she says. “You can also revalue your home and see whether your property value has increased since you purchased it, which may be true for some people in this market.”

Stevens agrees enabling the transfer of LMI would improve competition in the mortgage market and make life easier for people with less than 20 per cent deposits.

A spokesperson for the Australian Banking Association, which represents the country’s major banks, said LMI provided flexibility for borrowers who have less than a 20 per cent deposit to get into the housing market.

“If a borrower remains with a lender and pays down more of the loan, in time, that borrower can refinance with a different lender and avoid paying LMI,” the spokesperson said.“Borrowers are also able to speak to their lender about refinancing with the same lender, as lenders may be able to offer a more-competitive rate.”

In 2018, the Productivity Commission recommended that banks offer customers a partial refund of the cost of LMI when borrowers choose to refinance their loan, advice adopted by many banks.

Data from APRA shows about 17 per cent of all home loans require LMI, down from 20 per cent in March 2019, largely as a result of the introduction and expansion of the First Home Buyer Deposit Scheme, which allows first homeowners to buy a property with as little as a five per cent deposit without the need to take out LMI.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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