Lenders’ mortgage insurance (LMI) enhances competition for high loan-to-value ratio (LVR) customers, which includes many first-time home buyers, QBE says.

“It is important to understand that LMI is not mandatory in Australia,” it says in a submission regarding Productivity Commission criticisms of the cover.

“LMI is efficient and cost-effective for both lenders and borrowers and is the choice of the market. We strongly believe alternative mechanisms to address high LVR risk are inferior.”

The commission’s draft report on financial sector competition identified LMI as a highly concentrated market in which consumers have little power to exert pressure on providers, and raised questions about its cost to borrowers.

QBE, one of the main LMI providers in Australia, says LMI cover is lower-cost than an interest rate loading, based on overseas examples, and borrowers can enjoy “very significant returns” on their investment due to house price growth and the gearing level.

The insurer says lenders have every incentive to obtain the lowest price and best deal possible from their LMI providers as they seek to win customers and manage their risks.

It rejects a suggestion that the Government should require lenders to offer LMI refunds when customers choose to refinance or pay out their loan.

“The cost of LMI is not an arbitrary fee like an exit fee, but is charged for the risk that is assumed by the LMI. Expressed in another way, a farmer could not get a refund for the delivery cost of a load of feed if, six months later, she chose to graze her cattle on neighbouring land.”