Lenders’ mortgage insurance (LMI) could disappear from the marketplace if lenders are not given capital relief, QBE LMI warns.

Without regulatory or structural incentives for using the cover, adverse market forces could drive it out of Australia, the insurer says in a submission to the financial system inquiry.

“This is the case in New Zealand, where LMI is no longer available.”

QBE LMI says such a decline would have a “calamitous impact on the property market” and, in turn, hit mortgage lenders.

It claims lenders that offer LMI – usually to borrowers with a deposit of 20% or less – should receive capital relief.

“QBE believes the inquiry should consider the important role LMI plays in the financial system and recommends capital relief be provided to IRB [internal ratings-based] lenders that utilise LMI.”

IRB lenders currently receive no capital benefit for using LMI, despite the fact LMI providers hold significant capital for the risk that is transferred, the submission says.