The LMI premium is passed on to the borrower as an upfront cost,and can be tens of thousands of dollars,though some lenders allow borrowers to add the cost to their mortgage principal and repaid monthly.
However,despite the exorbitant costs,borrowers are unable to move their LMI between lenders,requiring them to cough up again for new insurance if they switch their home loan to a different lender.
With interest rates rising rapidly,this can lead to situations where homeowners may want to refinance but are unable to afford the cost of new LMI,effectively trapping them into staying with their existing lender.
If they are with a big-four bank,this could see borrowers paying interest rates upwards of 1.7 percentage points higher than smaller,competing lenders.
Peter Marshall,banking expert at financial literacy site Mozo,said the LMI rules are archaic and should be reviewed.
“This insurance was set up a long time ago,and given that people these days now need to borrow large amounts for their mortgages,it’s important they be able to shop around and switch to get better rates,” he said. “If LMI could be made to be transferable,that would make the refinancing process easier and a lot cheaper.”
Marshall also said the number of LMI providers are limited,with major insurers Genworth and QBE taking the lion’s share of the market. More providers would improve options for borrowers and could lead to lower costs.