AN IDEA FOR FIRST HOME BUYERS? Abandon Loan Mortgage Insurance

By Alex May

Banks have poo-pooed an idea which could allow first home buyers to save money when they take out their first mortgage.

The NSW government’s Centre for Affordable Housing is investigating whether banks and lenders could absorb the costs of lenders mortgage insurance – also known as LMI – for first home buyers.

The Australian Bankers Association says LMI – which is levied on all mortgages issued without a 20 per cent deposit and is charged to the majority of first home buyers – is a cost of finance which must be passed on to the consumer.

LMI can cost from $2000 up to $11,000 for properties costing less than $500,000 and insures the bank against default, not the house buyer.

It is often “capitalised” into the loan, which means borrowers pay interest on the charge, but the insurance protects only the bank rather than the person paying for it.

The NSW Real Estate Institute and NSW Housing Minister Joe Tripodi have both called on banks to stop charging the thousands of dollars in LMI costs for first home buyers.

REI president Rowen Kelly says the majority of first home buyers in NSW have to pay LMI, which eats into the $7000 Federal Government first home buyers grant and the state government stamp duty concessions for first home buyers.

“You have a situation where governments effectively pay for banks to insure against a risk that they could quite easily carry or absorb on their own,” he says.

“That’s what a lot of retailers and multi-national companies do when insurance costs are high, they carry the risk themselves,” he says.

Housing Minister Joe Tripodi says a recent JP Morgan Fujitsu report into the Australian mortgage industry shows costs and fees are up to 35 per cent higher in Australia than in the US or UK.

“I don’t accept a ‘do-nothing’ approach by the banks,” Tripodi says.

“Lenders benefit from the insurance by reducing their risk but force home buyers to pay the insurance premium.”

Mortgage Choice’s national manager of corporate affairs Warren O’Rourke agrees that anecdotal evidence says “by far the majority” of first home buyers pay LMI.

“In a perfect world, you would prefer not to pay LMI but then in a perfect world, you would probably prefer not to have to borrow to buy property,” O’Rourke says.

The Australian Bankers Association says LMI is a benefit to first home buyers, as it allows them access to home ownership without having to save a 20 per cent deposit.

It says abolishing LMI would eventually lead to first home buyers without a 20 per cent deposit having to borrow in the unregulated finance market and pay higher interest rates.

ANZ spokesman Paul Edwards says loans of more than 80 per cent of a property’s value are riskier and The Australian Prudential Regulation Authority requires LMI to allow the mortgage.

“If there is an idea for subsidising first home buyers, that’s for governments to consider rather than banks – and if real estate agents were serious about this, they could always cut their commission,” he says.

A spokesman for the Housing Minister says more information on the LMI report from the Centre for Affordable Housing should be available in the middle of 2005.