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Premiums hit mortgage borrowers

Lenders mortgage insurance (LMI) premiums are going through the roof, rising close to 50% in the last year alone.

LMI on a typical $500,000 property, with the borrower kicking in a 10% deposit has surged from less than $6,000 to nearly $9,000 according to mortgage broker Home Loan Experts. Broker Mortgage Choice (ASX:MOC) estimates that LMI on a $410,000 property could be as high as $10,672, but if capitalised, could cost as much as $31,680 over the 30 year life of the loan.

The insurance affects around 25% of all homebuyers taking out a loan, is poorly understood and hardly discussed in much detail. LMI is charged when a borrower has a deposit of less than 20%, and protects the bank or lender, and not the borrower. Many borrowers may not even realise that. Borrower also don’t get to choose the best or cheapest LMI provider – the insurer gets chosen for them.

It’s one of the many reasons why borrowers are reluctant to switch to other lenders, as they could be faced with paying LMI more than once, if they have less than 20% equity in their home. There’s no refund either, and runs into thousands of dollars, with the premium payable up front and in full.

Finance Brokers Association of Australia president Peter White says, “It should be made portable”, adding that greater disclosure was required. Consumer group Choice agree, with spokesman Tom Godfrey telling news.com.au, “Lack of portability around lenders mortgage insurance significantly affects consumers’ ability to switch banks.

Genworth and QBE Insurance (ASX:QBE) are the two main providers of lenders mortgage insurance in Australia, with QBE’s LMI premiums reported to have risen 17% since 2010. A spokesperson for QBE told news.com.au that premium increases were due to elevated claim levels, higher reinsurance costs and lower investment income.

Australia’s largest home loan lender, Commonwealth Bank (ASX:CBA) reports that around 25% of its loans require LMI, with first home buyers the hardest hit. Mortgage Choice recently found that a third had to borrow more than 80% of the value of the property.

Foolish takeaway

Having just had to pay thousands of dollars in LMI for the second time on a property, I can understand how borrowers feel. Without more clarity and flexibility around lenders mortgage insurance, its an area that’s open to abuse by the banks and insurers.

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Motley Fool writer/analyst Mike King owns shares in QBE Insurance.

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