More pain for first-home buyers as Genworth and QBE LMI push up mortgage insurance premiums

Borrowers who don’t have a 20% deposit will be forced to pay higher lenders mortgage insurance (LMI) premiums following the two dominant providers – Genworth and QBE LMI – both increasing their premiums in the last 12 months. 

This is despite Australia having among the lowest mortgage default rates in the world. 

Fitch reported that mortgage delinquencies rose from 1.57% in the December 2011 quarter to 1.6% in the first quarter of 2012 – equating to about $35 million worth of loans turning bad. 

LMI is a one-off premium that protects lenders if a borrower defaults on their home loan - if the property sells at a loss, the lender can make a claim against its LMI provider for the shortfall. 

LMI can added thousands of dollars to the cost of buying a home and is particularly an issue for first-home buyers given the 20% deposit requirement. 

Calculations using the Genworth LMI premium estimator show that a first-home buyer borrowing 95% on a house valued at $500,000 (so a $25,000 deposit) would be required to pay an LMI premium of close to $16,000 on a 30 year variable-rate loan. 

A 10% deposit would reduce the premium to just under $8,000. 

A further issue is a lack of portability – if borrowers refinance with a new lenders and they still don’t have a 20% deposit, LMI must be paid again. 

Mortgage broker and director of Investors Choice Mortgages, Jane Slack-Smith, says she would expect LMI premiums to increase if there was an increase in delinquent loans “however it is not something I have seen in my business and not something that I have heard either LMI provider discuss in their updates”. 

Slack-Smith suggests that with interest rates so low, potentially the LMI providers are expecting issues for today’s buyer in the future when rates return to the long term norm of around 7.5% - “a way of hedging the future risk”. 

QBE LMI chief executive Jenny Boddington told Property Observer it increased base premiums on its core LMI products as of July 1 this year.

"We regularly review our pricing to ensure stable and reliable provision of our lenders’ mortgage insurance across the economic cycles,” she says.

Boddington says changes to premiums in recent years have mainly been driven by increased regulatory capital requirements, continuing subdued returns on our investment portfolio and slight increases in claims.

A spokesperson for Genworth confirmed that premiums have increased in the Australian market over the past twelve months.

“As a prudent insurance business, Genworth regularly reviews all elements associated with our product offering.

“This review takes into consideration the current market environment and the costs associated with providing our product and service delivery, including the cost of capital, portfolio performance and changing investment yields.

“Each individual LMI premium is calculated on the basis of a wide range of factors related to the size of the borrower’s deposit, the loan purpose, and the property. As such, pricing changes are based on a detailed analysis of each risk factor.”

Updates sent to brokers by lenders confirm the increases as well as changes to some products and offerings. 

An email sent to mortgage brokers by the Commonwealth Bank’ in June tells them that LMI will increase for “home/investment home loan and line of credit applications created from Sunday 2 June 2013”. 

“We are making these changes in line with pricing changes from our preferred LMI provider, Genworth,” says the Commonwealth Bank’s head of third party banking Kathy Cummings. 

An email sent to brokers by Suncorp says QBE LMI will increase base premium on three of its products - “lmiHOME™, lmiINVEST™ and lmiFIRST HOME™”. 

It’s not all bad news.

The Suncorp note also says QBE has of July 1 extended the eligibility criteria for its lmiFIRST HOME product - a discounted lenders mortgage insurance offering designed for first home buyers - to individuals who are purchasing or building a residential property for owner-occupation and who also qualify for the first-home owners grant and FHB stamp duty concessions.

The move is presumably to take in those FHBs who have qualified for the bigger state grants now available for new home purchases.