Brokers are calling for further competition in the LMI space as premiums continue to rise, while LMI providers have defended the price hikes.
Following revelations of LMI provider QBE’s financial strife in its North American business
, a number of Australian Broker
readers expressed their frustration at “ever-increasing” premiums.
Marty McDonald, director of Mortgage Experts Online, says premiums for loans with an LVR of over 90% have “almost doubled” in the past five years.
“I understand that APRA wants them to have enough contingency in case there was ever a property crash, but I think they’re gouging and there’s no competitive pressure between [Genworth and QBE]."
Currently, for a client looking to purchase a $700,000 home at 97%, the LMI will be approximately $28,500, calculates McDonald.
“Then there are stamp duties and legal fees which equate to about $30,000 and then they have to fund the deposit… so basically they’re going to have to come up with about $82,000 for an average priced house in Sydney.
“Everyone’s got their finger in the pie and the poor first home buyers are left with 3% equity and they’ve put $82,000 into it.”
reader James warned brokers to prepare for further increases in coming years, calling current prices "ridiculous" and calling for increased competition.
“Incumbent lender agreements” may be serving to discourage more competition entering the market, says McDonald, and other providers are likely cautious following difficulties in overseas property markets.
“But I think if they had a closer look they might find it’s quite an attractive proposition because they could just charge a little bit less than what Genworth and QBE are charging and I’m sure they’d be making some very healthy margins.”
Genworth Financial Mortgage Insurance recorded a net profit of $172m in the last financial year, while QBE Lenders' Mortgage Insurance recorded $154.5m.
A Genworth spokesperson, while acknowledging that premiums have increased in the past five years, refutes the claim that there is insufficient competition in the market.
“While it is true that prudential capital requirements and pre-existing relationships could potentially pose difficulties for new entrants, Genworth believes that there is already healthy competition in the mortgage insurance market given the options available to lenders.
“Our premiums have increased over the period specified (though they certainly haven't doubled), not least because of the impact of the GFC and the risk associated with continuing global economic uncertainty, but prior to this premiums had not increased for several years.”
Lenders have the option of using two one of two private insurers, their own “captive insurer” in some cases, or can choose to retain the risk themselves, says Genworth.
QBE LMI CEO Jenny Boddington echoed this sentiment, adding that lenders have the option of providing a low equity fee as an alternative to LMI.
"We regularly review our pricing to ensure stable and reliable provision of LMI across the economic cycles. Changes to premiums in recent years have mainly been driven by increased regulatory capital requirements, continuing subdued returns on our investment portfolio and increases in claims," says Boddington.
Both providers pointed to LMI as an “enabler” for first home buyers, assisting those that are unable to save a large deposit to get onto the property ladder sooner.
Encouraging more first home buyers into the market is an important issue for government and the industry, says Genworth.
The insurance provider is looking at hosting a summit in Canberra next year focused on housing affordability, as well as contributing to the Senate’s Economic References Committee’s hearing.
“LMI is a financial product that may or may not suit each of your customer’s individual needs. It is an effective tool that can be used to get people into homes more quickly and avoid the rental trap.
“We believe that consumers are best served by being presented with a range of options, with the costs and benefits clearly articulated, and that brokers are ideally positioned to provide this valuable service.”