LMI jumps as house prices boom, but most home buyers don't realise it only protects the bank By Emilia Terzon

 

Australia's COVID property boom has pushed more people into paying for costly mortgage insurance that protects their bank, while only adding to the borrower's mounting pile of debt. 

Exclusive data given to ABC News shows there has been a rise in the number of lenders mortgage insurance (LMI) policies being taken out. 

LMI has been a contentious financial product for years. 

It is a lump sum insurance product that many lenders expect people to pay for when they take out a mortgage with less than a 20 per cent deposit. 

While the borrower pays for it, it does not protect them. 

The insurance pays out to the lender in the event that a mortgage defaults the property sells for less than the amount owed, and the bank is left out of pocket. 

Data shows that 70 per cent of people paying for it are first home buyers. 

Nitin Chauhan and Priya Verma had been saving for several years to buy their first home in Adelaide. 

The couple were initially trying to avoid LMI by saving a 20 per cent deposit, but as property prices started to soar last year, their goal became less attainable. 

"The same type of houses which were earlier in the range of $700,000 to $750,000, they just went up to $800,000 and $850,000 in just a few months," Ms Verma said. 

"The same amount which was earlier 20 per cent deposit actually became 10 per cent when the prices increased." 

CoreLogic data shows house prices in Adelaide soared by 18 per cent in the last year – a figure replicated in markets across the nation. 

"We just lost hope that we will get to 20 per cent deposit," Mr Chauhan said. 

"Because by the time we get to save 20 per cent, the property prices will still go up. And that would push us out of the market." 

Rather than downgrade their property expectations, the couple made the "hard decision" to boost their overall mortgage, which in turn saw them pay for LMI. 

The insurance was a lump sum of almost $25,000, added onto their base loan. 

"It's not just the cost of $25,000. We will be paying interest on top of it because it's accumulated in the loan," Mr Chauhan explained. 

"That $25,000 is a big amount. 

"We could have easily done all our renovations that we are planning right now. It could have paid for our son's education." 

LMI lining insurers' pockets during COVID 

Data from Digital Finance Analytics shows the number of LMI policies taken out in Australia rose by 25 per cent from 218,593 in 2019 to 273,473 in 2020. 

More than 150,000 policies were taken out in the first six months of this year. 

LMI loan growth during the property boom (thousands) 

Data from Digital Finance Analytics shows the number of LMI policies taken out in Australia rose by 25 per cent from 218,593 in 2019 to 273,473 in 2020. 

More than 150,000 policies were taken out in the first six months of this year. 

Mansour Soltani is a mortgage broker who specialises in loans for first home buyers. 

"We're definitely seeing a spike in LMI applications," he said. 

"I want (my clients) to understand that they are paying for an insurance policy that doesn't cover them. It covers the bank. 

"There's a bit of a 50-50 split in terms of an understanding around that." 

The two biggest external suppliers of LMI are insurance giant QBE and specialist provider Genworth. 

Genworth confirmed to ABC News that it had seen a 15 per cent increase in policies being taken out in the last six months compared with the same time last year. 

"This was driven by owner-occupiers and first home buyers that have taken advantage of the low interest rates to enter the housing market," a spokesperson said. 

Genworth also posted a $60 million profit in the same six months. That was after it posted a $90 million loss in the previous corresponding six months. 

Some lenders are also now doing LMI in-house, such as ANZ. 

That means people taking out loans with these lenders without a 20 per cent deposit are essentially paying a premium to their bank to protect its own loan. 

"Banks are starting to cotton onto the fact that they can make money off these products," Mr Soltani said. 

"My issue with that is they're then incentivised to push you down the LMI route, rather than try to find products or come up with innovative products to help you avoid it. 

"Everybody sees LMI as dead money. 

"The absolute worst way you can do it would be to amalgamate the cost of LMI into your loan, because then you're spreading that cost across 30 years and paying interest on it. 

"The banks obviously gain a financial advantage by you doing this." 

So why does the finance sector push LMI? 

QBE, Genworth, the four major banks, the Insurance Council of Australia, and the Australian Banking Association all declined to be interviewed about LMI. 

One rationale given to ABC News by the industry for the ongoing prevalence of LMI was that it brought confidence to the lending market. 

"LMI is an important component of Australia's housing market," the ICA said in a statement. 

"[It enables] more Australians to achieve the dream of home ownership, or enabling them to achieve this goal earlier, by reducing the credit risk of the lender providing the home loan." 

The current property boom has been helped along by low interest rates and subsidies during COVID. 

"The question of course becomes what happens in a down market if prices were to start falling?" Digital Finance Analytics principal Martin North said. 

"That's when this whole thing could come unscrambled." 

Mr North said it is difficult to see how many policies the likes of QBE and Genworth are paying out because company results do not disclose the percentage. 

Debt trap for those who default 

The insurance is only paid out to the lender in the event that a mortgage defaults and its sale price does not cover what the bank is owed. 

In that instance, the insurer pays out the lender's missing money. 

The catch for home owners is that the insurer can then come after the person who had defaulted on the mortgage to recoup the money it has paid out to the bank. 

That 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 did not realise they had LMI on their mortgage and did not understand what it did. 

After their repossessed home sold at a loss and their lender was paid out LMI by QBE, the insurance company then wanted repayment of $87,000 off the Tollans. 

The couple avoided bankruptcy by going into a debt agreement to pay back the cash. 

"We've been paying off and we're still paying it off," Ms Tollan said. 

That is despite Ms Tollan now being on disability support and her husband being unemployed to be her carer. She pays off $290 a fortnight and he pays off $134. 

"It's demoralised us," Helen said. 

"You have to ask if you want anything, because we don't have any money of our own. We always have to ask my son or daughter-in-law if we want anything." 

Almost a decade after they defaulted, the couple expects to pay off their debt next year. They urge anybody taking out mortgages to educate themselves. 

"Be very, very careful," Ms Tollan warned. 

Data from Digital Finance Analytics shows the consumer understanding of who LMI actually protects is still very limited. 

QBE would not comment on the Tollans' case. 

However, it confirmed that it still had a policy of making borrowers pay back defaulted costs in some circumstances, noting that it also had hardship policies. 

The corporate regulator also confirmed this industry policy. 

"The customer is still liable for the remaining debt and that debt may be recovered from the customer by the bank, or the insurer or a third-party debt collector," ASIC said in a statement. 

Ongoing calls for review of LMI 

LMI specialist Martin North has long been calling for a review of the product. 

"I've called for this over a number of years. So far, it's fallen on deaf ears," he said. 

"There is a big question in my mind as to whether this is really beneficial to the market and beneficial to borrowers. It certainly is beneficial to the banks, though." 

Several major banks confirmed to ABC News that they do sometimes waive LMI on mortgages with less than 20 per cent deposit if people are in careers deemed stable, such as accounting. 

Nitin Chauhan and Priya Verma believe they should have qualified for this waiver, as Mr Chauhan works in corporate management in technology. 

"Our jobs are secure and we earn a high wage," he said. 

"If someone can default 95 per cent of the bank amount, they can also default 80 per cent of the bank amount. 

"I really feel not very happy with paying this much amount to a third-party insurer. 

"[The banks] are trying to just pass on their risk to a third-party insurer. 

"The insurers are obviously having like a honeymoon period because of the property boom. They are making big money out of this." 

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