OPINION -- On the right path

The GFC has changed the mortgage industry landscape forever. Today, mortgage lenders have a new appreciation of risk, which includes the value and role that LMI plays in managing and mitigating mortgage risk and losses. The federal government’s First Home Owners Grant Boost scheme assisted over 190,000 first home buyers to get into the housing market and LMI assisted over 50 percent of these buyers – who didn’t have the minimum deposit requirements – to achieve their dream of home ownership in 2009.

Recently, the RBA confirmed that the Australian Office of Financial Management (AOFM) repurchase programs will be wound back. Consequently, non-major and non bank lenders are now accessing alternative funding securitisation markets to support their lending programs, which will require increased LMI support. The consolidation of Australian Deposittaking Institutions, outside the big four banks will continue, and generally the competitive landscape will improve for non-major lenders. In addition, the introduction of the National Consumer Credit Protection Act requires credit providers to assess the suitability (including serviceability) of a loan being offered to a borrower. While some lenders have tightened their credit criteria (maximum LVRs) for some borrower segments this will provide opportunities for those other lenders who have more competitive offerings in the market. QBE LMI will continue to provide lenders and borrowers with access to 95 per cent LVR loans where they meet prudential credit criteria. But while QBE LMI continues to lend at 95 per cent, we have found that a lot of borrowers are confused as to what this actually means.

Myths & misconceptions

By reducing the deposit required, and helping to minimise lending interest rates, many borrowers are able to enter the housing market sooner or upgrade their home choice as their lifestyle changes in the future. The opportunity for brokers is to help borrowers appreciate the benefits of LMI. For borrowers, LMI provides them with the freedom to make more choices regarding when and what they buy. QBE LMI relies on brokers to adequately explain to borrowers that although the LMI premium is paid by the borrower, it in fact insures the lender against loss in the unfortunate event that they default on their home loan and their security needs to be sold. Borrowers can have all sorts of misconceptions about LMI. For example, LMI can be very often confused with mortgage protection insurance, which is a different product that covers borrowers for the payment of their mortgage instalments in the event of unforeseen circumstances, including unemployment, illness or death.

Our expectation of brokers, as a trusted adviser, is to educate borrowers on the costs (including LMI) of obtaining a home loan and servicing that loan in the future.

Outlook

The outlook for the Australian housing market in line with the general state of the economy is positive, with housing prices set to continue to increase in 2010 and into 2011. Current projections from BIS Shrapnel show average property prices increasing over the next two years to June 2011 by 13 per cent in Melbourne, 8 per cent in Sydney and 6 per cent in Brisbane per annum.

Interest rates returning to more normal levels and an improvement in the national unemployment rate, coupled with strong immigration and consumer confidence, will underpin demand for housing in Australia for some time.