In its draft report, released following its review into competition in the Australian financial system, the Productivity Commission (PC) has claimed that mortgagees with a loan-to-variable ratio (LVR) of over 80 per cent are compensating lenders twice through the payment of lenders mortgage insurance (LMI) and higher interest rates.
“Home loan consumers with a loan-to-value ratio in excess of 80 per cent are often required to compensate lenders twice for this risk: by bearing the cost of lenders mortgage insurance, and also by paying a higher interest rate on their home loan, even after other loan and borrower characteristics have been accounted for,” the PC’s draft finding 8.3 reads.
Consulting the PC, former CEO of the Australian Institute of Professional Brokers Maria Rigoni suggested that high-risk borrowers are paying “many thousands” in unnecessary premiums.
“In the circumstance of high loan-to-value ratio or low-deposit loans, we see a premium interest rate for risk being applied,” Ms Rigoni said.
“Yet these borrowers pay many thousands of dollars for the lenders mortgage insurance premium, which protects the lender against loss due to borrower repayment default.”
The PC urged lenders to produce LMI fact sheets to better inform prospective borrowers, as proposed by the federal government in 2011.
Further, the PC called for the introduction of “automatic reimbursement of unused” LMI for borrowers that have paid off their loan or are seeking to refinance.
Moreover, in an additional measure to better inform borrowers, the PC believes that in order to “shine a light” on home loan interest rates, industry regulators should collect and publish data, on an ongoing basis, for consumer consumption.
“To improve the negotiating power of consumers, data should be collected on an ongoing basis from lending institutions by APRA on the interest rates for pre-determined and commonly used categories of new residential home loans.
“This data should be published regularly (monthly) on ASIC’s website in a form that would enable consumers to determine, for their particular circumstances, what home loan interest rate others in those same circumstances have received. Currently available digital data collection methods allow close to real-time updating of such data.”