The Insurance Council of Australia (ICA) has defended the lack of portability in lenders mortgage insurance (LMI), despite Federal Government moves to make the transfer of mortgages between banks cheaper and easier.

In a submission to the Senate inquiry on banking, ICA argues that LMI is for the lender rather than the borrower, thereby making it a wholesale product rather than retail.

The Finance Brokers Association of Australia in its submission to the Senate inquiry last month attacked the lack of portability for LMI products.

“The termination of the existing mortgage and new arrangement is treated operationally, legally, and from a regulatory, rating agency and capital perspective as a new risk,” ICA says in its submission.

“In addition to the borrower and new loan attributes, the new lender attributes may also constitute a different risk profile for an LMI provider and underwritten and priced accordingly.”

When a borrower seeks a new housing loan, it is up to the lender to choose whether to insure the mortgage, the ICA says.

The lender might want to recoup any costs involved with self-funding the risks involved with the loan.

“If a loan has been in place for a number of years, usually the borrower has accumulated sufficient equity to meet the deposit requirements of the new lender and LMI is not required,” ICA said.  

“Where this is not the position and LMI is required, the percentage of borrowers who wish to refinance on a like-for-like basis to another lender is less than 1%.”

The council says only 20% of all mortgages are insured, and of those 30% are loans that have been refinanced.

Of the loans that have been refinanced, 10% are for the same sums so there is no increased risk for the LMI provider.

In its submission to the Senate inquiry, Genworth Financial argues the private insurance sector has provided a workable model for LMI and has bought benefits for homeowners.

“LMI contributes to and achieves housing affordability, housing accessibility, risk management, market discipline and provides capital buffers and is a strong story and tradition that should be recognised by governments.”

The insurer argues “regulators and policymakers need to take into account the broader beneficial effects of LMI on economic efficiency and financial stability”.

ICA says the LMI industry, which is dominated by QBE (which has not made a submission to the inquiry) and Genworth, supports Federal Government moves to introduce a central repository for mortgages to enable easier refinancing.

But it believes dealing with consumer concerns and explaining how this type of insurance works should be the focus in the future.