A Labor election pledge to guarantee low-deposit loans for all first home buyers could make the lenders’ mortgage insurance market unviable and expose taxpayers to billions of dollars in losses in a housing downturn, the Insurance Council of Australia warns.

The loan guarantee scheme expansion would let more first home buyers make 5% deposits without having LMI. There would be no caps on places or income, and increased property price limits. 

ICA says the policy would effectively nationalise a long-standing and effective financial product that has facilitated access to credit and home ownership, supported financial system stability and underpinned lending competition.

“By subsidising all first home buyers, including those with a good income and savings in the bank, the purpose of the First Home Guarantee scheme is lost and a functioning private market may be severely and irreversibly impacted,” CEO Andrew Hall said.

“LMI insurers have played an important role in the stability of the financial sector and the economy for 60 years, and any policy that may eliminate this needs to be considered very carefully.”

Mortgage providers usually require buyers to pay for LMI if their deposit is less than 20%, to reduce the lenders’ risk if borrowers cannot make repayments. 

ICA says the Home Guarantee Scheme should be more effectively targeted to borrowers in greatest need of assistance – such as single parents, essential workers and key workers in regional areas – rather than expanded to all first home buyers.

The federal government guarantee to help low-deposit buyers enter the market was announced in the May 2019 budget and took effect in January 2020. Initially, it had a cap of 10,000 guarantees a year.

Following later expansions, 35,000 places were made available for the current financial year, subject to income caps of $125,000, (or $200,000 combined).

The government has also offered 10,000 places under a regional first home buyer guarantee and 5000 places under a single parent guarantee. 

Listed LMI provider Helia said today that public statements by the government significantly underestimate the cost of an expanded scheme.

The LMI industry has incurred claims of almost $300 million over the past five years, reflecting the unusually benign environment for claims and the economy, but in the preceding five years incurred claims had reached almost $1.2 billion, the company said.

"The government and ultimately Australian taxpayers do not need to be exposed to future claims risk from schemes, where functioning private markets already exist," a spokesperson told insuranceNEWS.com.au.

Simply expanding the first home guarantee scheme would further increase demand-side pressures and push up housing prices, and those who become eligible through relaxed income caps would likely have been able to enter the housing market anyway, the company says.

Helia said in February that the home guarantee scheme was having a “material impact” on the LMI market and represented 38% of total lending that was either insured or government-guaranteed.

Labor announced the scheme expansion yesterday at its campaign launch in Perth, where it also promised to invest $10 billion to build up to 100,000 homes for sale only to first-time buyers.

ICA says Labor must ensure the homes are not built on floodplains or in other areas exposed to high levels of extreme weather risk.