Banks are considering calling in or refusing loans on uninsured homes, risking creating “climate ghettos” across the country, an expert told a Senate inquiry into the impact of climate risk on insurance. 

Climate Risk Group CEO Karl Mallon told a hearing on Friday that increasing numbers of homeowners are facing unaffordable premiums, primarily due to “precision” address-level assessment of flood risk. 

“That will have knock-on effects on the ability to obtain a mortgage, because bank lending is contingent on there being insurance,” he told the select committee. 

Dr Mallon says that while “banks don’t normally check”, this situation could change.

“There is a lot of pressure on banks to disclose whether there are risks to their commercial and residential lending,” he said.

“So we think banks will increasingly check. They will screen.

“Once you can't get a mortgage on a property, there’s essentially a value collapse. We've probably started to see it already. There's early evidence that, for example, in Lismore, prices have gone down by about 30%.”

Dr Mallon says that if the banks move, the consequences will be severe.

“I want to be very careful about this point because we think this is on a knife edge now.

“We know there are banks that know exactly which properties in their portfolio are at risk, and they're not calling in the loan and they're not screening out yet.

“They're screening so they know, but they haven't made the tip to say, 'that's it; we're calling in these loans,' or 'we're not going to provide cover for these.’

“The reason they're not doing it is that they know the socioeconomic consequences that will have, and they don't want to take that step.”

Dr Mallon says he has sat in meetings with “very big banks”.

“They're saying, 'is there any way we can avoid this?' 

“In a way, they want a solution because they don't want to make this step. 

“Once they tip to say, 'that's it; sorry, we're calling in the loan,' or, 'we're not going to issue,' that's when we see the click into a climate ghetto.

“Because, once that happens, in a way the switch has been flipped.”

Recordings and transcripts from the hearings are available here.