Mortgage insurance from lenders surges as house prices skyrocket, but most buyers don’t realize it’s only protecting the bank
The COVID real estate boom in Australia has pushed more people to pay for expensive mortgage insurance that protects their banks, while only adding to the borrower’s growing debt.
- Data shows the number of LMI policies increased by 25% in the past year
- Many people who pay for this insurance don’t understand it
- The financial sector defends it as necessary to allow more people to access mortgage loans
Proprietary data provided to ABC News shows that there has been an increase in the number of mortgage insurance policies (LMI) from lenders written.
LMI has been a controversial financial product for years.
This is a lump sum insurance product that many lenders expect people to pay when they take out a mortgage with a deposit of less than 20%.
Although the borrower pays for it, it does not protect them.
Insurance pays the lender when a mortgage defaults, the property sells for less than the amount owed, and the bank is left out.
Data shows that 70 percent of the people who pay for it are first-time home buyers.
Nitin Chauhan and Priya Verma had been saving for several years to buy their first house in Adelaide.
The couple were initially trying to avoid IMT by saving a 20 percent deposit, but as house prices started to soar last year, their goal became less achievable.
âThe same type of houses that used to be between $ 700,000 and $ 750,000, they went down to $ 800,000 and $ 850,000 in just a few months,â Ms. Verma said.
CoreLogic data shows house prices in Adelaide have climbed 18% in the past year – a figure replicated in markets across the country.
âWe have just lost hope of reaching a 20% deposit,â Mr. Chauhan said.
âBecause when we save 20%, real estate prices will go up again. And that would push us out of the market. “
Rather than lowering their home ownership expectations, the couple made the âtough decisionâ to increase their entire mortgage, which allowed them to pay for LMI.
The insurance was a lump sum of almost $ 25,000, added to their basic loan.
âIt’s not just the cost of $ 25,000. We will pay interest on top of that as it is accrued in the loan,â explained Mr. Chauhan.
âThis $ 25,000 is a big amount.
âWe could have easily done all of our renovations that we are planning right now. It could have paid for our son’s education.
LMI lines insurers’ pockets during COVID
Data from Digital Finance Analytics shows that the number of LMI policies written in Australia increased by 25%, from 218,593 in 2019 to 273,473 in 2020.
Over 150,000 contracts were taken out in the first six months of this year.
Mansour Soltani is a mortgage broker specializing in loans to first-time buyers.
âWe are definitely seeing a spike in LMI applications,â he said.
“There’s a bit of a 50-50 split in terms of understanding about this.”
The two largest external providers of IMT are insurance giant QBE and specialist provider Genworth.
Genworth confirmed to ABC News that it has seen a 15% increase in policies written in the past six months compared to the same period last year.
âThis was driven by homeowners and first-time home buyers who took advantage of low interest rates to enter the housing market,â a spokesperson said.
Genworth also posted a profit of $ 60 million in the same six months. This was after recording a loss of $ 90 million in the previous corresponding six months.
Some lenders now also perform LMI in-house, such as ANZ.
This means that people who take loans from these 20% deposit free lenders are essentially paying a premium to their bank to protect their own loan.
âBanks are starting to believe that they can make money with these products,â Soltani said.
âMy problem with that is that they’re then tricked into pushing you down the LMI path, rather than trying to find products or come up with innovative products to help you avoid it.
âThe worst way to do it would be to merge the cost of LMI with your loan, because you then spread that cost over 30 years and pay interest on it.
âBanks obviously gain a financial advantage by doing this. “
So why is the financial sector pushing LMI?
QBE, Genworth, the Big Four Banks, the Insurance Council of Australia and the Australian Banking Association all declined to be asked about LMI.
One justification given to ABC News by the industry for the continued prevalence of LMI was that it brought confidence to the loan market.
âLMI is an important component of the Australian real estate market,â the ICA said in a statement.
“[It enables] more Australians to realize the dream of homeownership, or enable them to achieve that goal sooner, by reducing the credit risk of the lender providing the home loan. “
The current housing boom has been helped by low interest rates and subsidies during COVID.
âThe question of course becomes what happens in a falling market if prices start to fall? Digital Finance Analytics Director Martin North said.
Mr North said it was difficult to see how many policies like QBE and Genworth are paying because the company’s results do not disclose the percentage.
The debt trap for those who default
Insurance is only paid to the lender if a mortgage defaults and its sale price does not cover what is owed to the bank.
In this case, the insurer pays the missing money from the lender.
The catch for homeowners is that the insurer can then go after the person who defaulted on the mortgage to get back the money they paid into the bank.
This is what happened to Perth couple Helen and Joe Tollan when they defaulted on the mortgage on their cyclone-damaged investment property in Cairns.
The couple didn’t know there was LMI on their mortgage and didn’t understand what it was doing.
After their repossessed home was sold at a loss and their lender was paid LMI by QBE, the insurance company then demanded a refund of $ 87,000 on the Tollans.
The couple avoided bankruptcy by entering into a debt deal to repay the money.
âWe paid and we are still paying,â Ms. Tollan said.
This despite the fact that Ms Tollan is now receiving disability assistance and her husband is unemployed to take care of him. She pays $ 290 a fortnight and he pays $ 134.
âIt demoralized us,â said Helen.
Almost a decade after their default, the couple hope to pay off their debt next year. They urge everyone who takes out mortgages to educate themselves.
“Be very, very careful,” warned Ms Tollan.
Data from Digital Finance Analytics shows that consumers’ understanding of who LMI actually protects is still very limited.
QBE declined to comment on the Tollans affair.
However, he confirmed that he still had a policy of forcing borrowers to repay overdue costs under certain circumstances, noting that he also had austerity policies.
The business regulator has also confirmed this sectoral policy.
“The customer is still responsible for the remaining debt and this debt can be collected from the customer by the bank, or the insurer or a third party debt collector,” ASIC said in a statement.
Current calls for IMT review
LMI specialist Martin North has long called for a product review.
âI have been asking this for a number of years. So far it has fallen on deaf ears,â he said.
Several large banks have confirmed to ABC News that they sometimes waive LMI on mortgages with less than 20 percent deposit if people have careers deemed stable, such as accounting.
Nitin Chauhan and Priya Verma believe they should have qualified for this waiver because Mr. Chauhan works in business management in the field of technology.
âOur jobs are secure and we earn a high salary,â he said.
âIf someone can default 95% of the bank amount, they can also default 80% of the bank amount.
“I am really not very happy to pay such a sum to a third party insurer.
“Insurers are obviously having a honeymoon period because of the real estate boom. They are making a lot of money out of it.”
Are you trying to avoid paying for LMI? Tomorrow we’ll bring you another story about the different ways Australians are already doing it.