Advocates have called for a sweeping reset of Australia’s mortgage architecture, warning that the current model leaves borrowers overly exposed.
A new report from Mortgage Stress Victoria and the Consumer Policy Research Centre, titled Australia’s broken mortgage market – Practical ideas for better products, has said that Australia’s variable‑rate‑heavy, privately insured mortgage system is failing borrowers and requires direct federal government intervention.
Report calls for a federal mortgages inquiry
The authors first set out the case for a dedicated national review, saying a one‑off, expert‑led process was needed to map out how a fairer mortgage system should work and what role government must play in building it.
“Looking at the international examples, it seems unlikely that markets alone will offer Australian consumers cheaper and fairer mortgages, government intervention is needed to offer Australians greater variety and value in the home lending market,” it read.
The report said the proposed inquiry would examine how to stimulate long‑term fixed‑rate lending, how to make variable‑rate products cheaper and fairer, whether Australia required lenders mortgage insurance (LMI) in its current form, and how to deliver consistent hardship support for borrowers in stress.
Push for long‑term fixed rates
The paper devoted substantial attention to long‑term fixed‑rate mortgages, saying that the current proliferation of short fixed periods and variable loans left households carrying too much rate risk.
“Most Australians with a mortgage cannot predict their housing costs beyond a short time frame. They could be paying hundreds or thousands of dollars more each month based on economic factors well outside of their control,” the report noted.
The authors said Australia fell short of comparable countries in the variety of mortgage options available.
Looking abroad, it pointed to funding models and government programs that supported long‑term fixed‑rate lending and urged policymakers to consider both market‑building and direct public lending approaches.
“If Australians want long-term fixed interest rates, we need to consider the other side of the ledger – what long-term funding options are available to encourage long-term lending?” the authors wrote.
The paper highlighted examples in Denmark, Canada, and the US, where public policy supported long‑term investment products, and South Korea, where the state directly offered long‑term fixed loans to targeted groups.
It stressed that the government could not remain “hands‑off” if it wanted borrowers to have genuine price certainty over the life of their loans.
Redesigning variable loans: Trackers and fixed payments
For the majority of borrowers who will continue to use variable products, the paper outlined ways to improve affordability and predictability by importing features used in other markets.
It highlights that possible options could include tracker mortgages, fixed‑payment loans, and automatic switching mechanisms.
The report presented tracker mortgages as a way to ensure cash‑rate moves flowed through more “transparently” to borrowers.
“This can ease the price uncertainty faced by mortgage holders, but it does not eliminate that uncertainty, unlike long-term fixed interest rate products which provide greater certainty,” it said.
The second major feature floated was a fixed‑payment loan, positioned as particularly suitable for borrowers on fixed or low incomes, which prioritised certainty.
“This loan type involves variable interest rates, but payments remain static, with the borrower paying more or less on the principal of the loan depending on this adjustment,” it noted.
The paper underscored that such product innovations should be paired with mechanisms that automatically move customers stuck on “very bad deals” to cheaper loans to reduce the stock of long‑term mortgage borrowers in the system.
LMI and hardship: From ‘worst of all worlds’ to a mortgage charter
On insurance, the paper delivered a blunt assessment of Australia’s primarily privately run LMI market, saying that the current model loaded extra cost onto high‑LVR borrowers without providing them with meaningful protection.
It contrasted Australia with other countries where government‑issued or backed mortgage insurance was common.
The authors outlined that the way LMI currently operated left borrowers paying for cover, which mainly protected lenders.
“Australian borrowers get the worst of all worlds with LMI. If they have a small deposit and are not eligible for first home buyer schemes, they pay insurance which protects the lender against risk of default,” the report read.
“Borrowers get no insurance coverage themselves and no support through better deals, discounted rates or assistance to maintain their loans if they experience hardship.”
To rectify this, the paper called for better public data on LMI market size, customer profiles, and claims ratios.
It also lobbied for measures such as shortfall payments and switching barriers, with options ranging from limiting the LMI market to redesigning or replacing it with more direct government intervention.
The paper noted that internationally, government insurance was often targeted to specific cohorts and was sometimes used to incentivise behaviours such as new construction, affordable housing, and energy‑efficient upgrades.
The final pillar of the package was to advocate a mandatory mortgage charter, which the report said was needed to ensure hardship support was consistent and transparent.
“Lenders have an obligation to consider requests for help and tailor assistance according to customer circumstances, but specific obligations on the type of help they offer are absent,” it stated.
“Hardship requirements are different between lenders – we have built a system based on the type of lender rather than the needs of the human experiencing the problem.”
Under the proposed charter, minimum protections would include the right to switch to a better loan during refinancing without additional affordability checks and receiving contacts from lenders before fixed‑rate periods ended.
It also encompassed early‑intervention obligations, fee and cost protections, and special measures such as full payment pauses and extended hardship periods for victim‑survivors of family violence.
[Related: Calls intensify for government to set up a bank]
