New LMI concessions heightening risks, warn analysts

Last month, Westpac subsidiaries St.George, Bank of Melbourne and BankSA slashed lender’s mortgage insurance (LMI) costs to just $1 for owner-occupier first home buyers (FHBs) with a loan-to-value ratio (LVR) of up to 85 per cent.

The banks claimed that the offer could save borrowers thousands in upfront costs.

Other lenders are set to follow suit to capture a larger share of the burgeoning FHB market, according to 58 per cent of analysts surveyed by rate comparison website Finder.

However, 83 per cent of respondents warned that an increase in LMI concessions would have “negative repercussions”.

According to Saul Eslake, economist at Corinna Economic Advisory, LMI waivers could encourage riskier borrowing behaviour at a time of instability in the residential property market.

“Reducing LMI leaves borrowers, and potentially lenders themselves, more exposed in the event that property prices fall, which is quite plausible, and may encourage people to take on more debt than they can sustainably service,” he explained.

Finder’s insights manager, Graham Cooke, agreed, pointing to COVID-induced sensitivities in the credit space, which have pushed borrowers into repayment holidays.

“Mortgage lending during the COVID-19 climate carries additional risk for both banks and their customers,” he said.

“Thousands of loans are already being deferred, and it’s the younger Australians who are the most vulnerable to job loss or an income reduction.”

The Australian Banking Association has reported that approximately 900,000 borrowers have deferred repayments on their loans since the onset of the COVID-19 crisis, of which residential mortgages make up over 60 per cent.

Mr Cooke added that lenders which reduce LMI costs may “compensate” by increasing costs linked to other product and service offerings.

Lenders have counterbalanced growing credit quality risks by tightening their serviceability assessment policies.

Policy changes have included debt-to-income ratio reductions and income shading, particularly for self-employed borrowers.  

[Related: Lender slashes LMI costs for FHBs]