Insurers are double dipping on one of the big hidden costs of buying a home, with some home owners slugged twice for lender’s mortgage insurance on the one property.
Borrowers with deposits of less than 20 per cent are forced to take out LMI at the time of purchase, and again if they choose to refinance with less than 20 per cent equity, prompting calls to reform the practice.
LMI is usually compulsory for buyers with a small deposit and protects the lender if the borrower defaults. It has cost home owners $6 billion over the past four years, according to financial comparison site Mozo.
Mortgage insurance is not refunded or transferred when borrowers refinance, which is particularly problematic for borrowers whose homes have declined in value, according to Mozo property expert Steve Jovcevski.
“If you started with a 10 per cent deposit in 2016 and have been working hard to pay down your loan to get to at least 20 per cent equity to allow you to refinance to get a cheaper rate, the 4.5 per cent fall property prices could be your worst nightmare,” he said.
According to Mozo, 23 per cent of owner-occupiers paid mortgage insurance, and a borrower with a 10 per cent deposit on a $500,000 home pays about $10,000 in LMI, either upfront or as part of the loan.
The fact that mortgage insurance is not transferable, in effect, locks home owners with low equity into sticking with their lender, or face being charged LMI twice if they refinance. It’s something Jovcevski says needs to change.
“It’s time lenders and mortgage insurers allowed these borrowers to move their loan without incurring a penalty,” he said.
“It’s just completely unfair and trapping borrowers to one lender.”
A Productivity Commission report in June recommended lenders refund the cost of LMI when borrowers refinance.
The report called on the Australian Securities and Investments Commission to require lenders to provide borrowers with the option to get some of their “unused” LMI back if they switched lender.
Commissioner Dr Stephen King said Australia did not have a healthy LMI market, with little competition.
Mortgage insurance is dominated by two major players: QBE and Genworth.
“If you’re an insurer you’d like the current system, but if you’re a borrower you don’t like the current system,” King said.
Making LMI refundable rather than transferable would make changing lenders simpler, according to King.
“There may be considerable differences between your new loan and your old loan,” he said.
“Simply transferring across will often mean there are going to be windfall gains or losses on both sides.”
The report also suggested allowing LMI to be paid in instalments, which Mortgage Choice chief executive Susan Mitchell said was “worthy of consideration”.
She said LMI should be treated the same way as other insurance products.
“If you purchase car insurance and decide to sell your car within the year, your insurer will refund the difference to you,” she said.
“The same logic should be applied to lender’s mortgage insurance in order to give borrowers the freedom and choice to switch loan providers if their needs change.”
QBE LMI chief executive Phil White said the proposals from the Commission would create “winners and losers”, as refunding LMI might raise its cost for borrowers.
“I do have sympathy for some people who want to refinance and those are people who fall out with their lender and want to move,” he said.
“But unfortunately we haven’t come up with a solution to help those borrowers.”
He acknowledged that the option for refunds could be good for people who chose to refinance at lower costs. But he warned that it would raise LMI costs for other borrowers.
The other major LMI provider, Genworth, declined to comment.
Melbourne home owner Rhiannon O’Neill paid $15,000 in mortgage insurance when she and her partner purchased their first home in Clyde North three years ago. She recently refinanced to take advantage of lower lending rates but had to pay another $1700 in LMI.
O’Neil said they were willing to pay so much for the insurance last time because they were desperate to get into the market.
“We needed to get into a property,” she said. “If anyone can avoid it they would.”