Scrapping LMI would lift rates ‘materially higher’: Suncorp

Speaking to the Productivity Commission (PC) on Monday, 5 March,, Suncorp’s CEO of banking and wealth, David Carter, claimed that lenders mortgage insurance (LMI) provides first home buyers (FHBs) with access to an otherwise unaffordable housing market.

“LMI is really important for the first home buyer market. If you’re going to lend to that market without LMI, the risk weights go up materially, and therefore the price would need to go up materially,” Mr Carter said.

In its draft report into competition in the Australian financial services sector, the PC alleged that borrowers with a loan-to-value ratio (LVR) of 80 per cent or higher could be “compensating lenders twice” by paying LMI and higher interest rates.

The PC issued an information request, asking: “Are there any circumstances in which it is reasonable for a home loan consumer to be paying both lenders mortgage insurance and a higher interest rate?”

In response to the PC’s inquiry into LMI, Mr Carter argued that without the fee, banks would be forced to increase rates on borrowers with greater risk.

“The price to the consumer for the loan itself would be materially higher without the LMI being there — the consumer would pay for that throughout the loan,” the CEO said.

“[LMI] does enable the risk to be more acceptable, so it causes us to want to compete in that market, which must be good for the consumer.”

Suncorp on macro-prudential measures

Further, Mr Carter urged regulators to revise current macro-prudential measures, calling for the exclusion of interest-only terms on construction loans from the 30 per cent cap.

The Suncorp representative believes that such a change would allow lenders to better service the FHB market.

The CEO said: “[First] home buyers are often also first home builders, and the current macro-prudential focus on interest-only adds up construction loans as part of interest-only, because for the first part of their duration as the house is being built, they are interest-only in nature, which is a logical thing to do.

“Customers are typically paying rent while they build the house until they move in, then they go to P&I [principal and interest], but we have to include that in our interest-only cap.

“[It] makes that relatively less attractive. We would have preferred it not to be included in the interest-only cap to enable us to fully support that market.”