Lenders’ mortgage insurance (LMI) companies will remain stable for the next 12-18 months, but long-term structural challenges may undermine the industry’s credit profile, according to ratings agency Moody’s.

LMI protects lenders if consumers default on home loans, effectively opening up the housing market to more people.

Moody’s stable outlook is a result of low interest rates and rising house prices, which have driven down claims and boosted new insurance written.

“However, the rapid increases in house prices and a nascent uptick in credit growth also threaten the sustainability of the Australian housing market and, in turn, the resilience of mortgage insurers’ portfolios,” Moody’s VP and Senior Credit Officer Ilya Serov said.

Major Australian banks do not receive regulatory capital benefit for using LMI, and an increase in self-insured, low-deposit mortgage products could affect demand.

Moody’s says “substantial time” will pass before these issues affect LMI companies’ credit profiles, but it intends to monitor any slippage in underwriting standards.

Reverting to a higher proportion of high-risk or interest-only loans would be credit-negative, it says. Stable capital levels above regulatory minimums would support credit profiles.