Government committee questions LMI structures

On Tuesday morning (14 September), the House of Representatives’ standing committee on tax and revenue began its inquiry in housing affordability and supply in Australia, calling before it members of Treasury to provide evidence on supply and demand levers and what government action, if any, was needed to improve the affordability of housing in Australia.

While discussing the growing cost of property in Australia – partly attributed to a lack of supply coupled with growing demand due to record-low interest rates – the committee noted that a major hurdle for entering the housing market was that saving for deposits for a home loan was getting increasingly harder given the rapidity in which house prices are rising coupled with slow wage growth.

However, Dr John Swieringa, assistant secretary in Treasury’s social policy division, suggested that while the barrier to entry was high, the affordability of home loans had not increased in real terms.

Dr Swieringa explained: “When you look at the structural decline in interest rates over 30-35 years, what’s happened is that prices have gone up, the ability to sustain a mortgage has stayed about the same, but what happens is, obviously, the deposit to get into the housing market in the first place has become the real pinch point for affordability. 

“Once someone can get into a mortgage – once they’ve got a deposit – generally, the affordability of that mortgage is the same as it has been in the past. So when you look at some of the government schemes like the First Home Loan Deposit Scheme, the First Home Super Saver scheme etc., those schemes assist with getting people over that threshold of the deposit.

“And whilst they may also indirectly add to demand – and from a first-principles perspective we might prefer to see supply side policies – they do actually assist with that particular point of where affordability is difficult.”

Treasury figures suggest that it takes around nine years for the average person to save for a deposit on a house in capital cities, and just over seven years for those in regional areas, the committee heard.

In response, Terry Young MP, the Liberal National Party of Queensland member for Longman, noted that the deposit hurdle was costly and that while lenders mortgage insurance (LMI) enabled borrowers to enter the market sooner (by enabling them to access mortgages with a deposit of less than 20 per cent of the property value if they pay the LMI costs), he suggested that the structure of the insurance was inappropriate.

Mr Young posited: “Would it be helpful if government could legislate that, once people had paid their equity down below 80 per cent, that they didn’t need mortgage insurance anymore? Because it seems ridiculous to me that they’re paying mortgage insurance, effectively, when they might only have a debt of 10 per cent against the value of the property in 20-25 years time, yet they’re paid this [cost] all up front. 

“It seems like a bit of a rort. To me the mortgage insurance should be put there and, once they get below that 80 per cent, they no longer need insurance, they can then cancel the policy if they want, and be refunded what they haven’t used.”

Dr Swieringa said that while some lenders will accept borrowers with higher loan-to-value (LVR) thresholds without requiring them to pay LMI (for example, 85 per cent), it was dependent on the risk appetite of that particular lender.

He added: “In a sense there is some competition out there [because] you can shop around a little bit on that basis (although some banks may also try and charge you a higher interest rate if they don’t charge you Lenders Mortgage insurance to try and cover themselves for the credit risk that way).”

However, Mr Young added that he thought the current LMI system was “unfair”.

The committee also asked questions around housing affordability from the Reserve Bank and the Department of Social Services on Tuesday.

[Related: Non-major bank offers 85% LVR with no LMI]