Safe as houses?

Plans to expand loan assistance for first home buyers could have risks for taxpayers, insurers warn

By Wendy Pugh

An election campaign promise to help first home buyers by widening a federal government loan guarantee has prompted the Insurance Council of Australia to warn of unintended implications for the financial system.

Labor’s plans for the program – which allows market entrants to obtain a loan with a 5% deposit and without paying lenders’ mortgage insurance – would increase its property price limits and remove caps on places and income.

But ICA says the changes would undermine the LMI market and effective nationalisation of first home buyers’ mortgage default risk would increase systemic financial risk.

“By subsidising all first home buyers, including those with a good income and savings in the bank, the purpose of the first home guarantee scheme is lost and a functioning private market may be severely and irreversibly impacted,” ICA chief executive Andrew Hall says.

LMI protects the lender when a home buyer has insufficient funds for a 20% deposit. If the customer then defaults on repayments and the property is sold for less than the amount owed, the insurance covers the shortfall for the financer. The premium – considered part of the cost of providing a higher-risk loan – is commonly passed on to the borrower.

Prime Minister Anthony Albanese told Labor’s election campaign launch that many people have incomes on which any bank would offer a typical home loan, and they would manage to make the repayments.

But house prices are rising faster than people can save their deposits and young Australians are being stranded below the property ladder’s first rung.

“At the moment, if you can’t get that 20% deposit, the only option is to pay $20,000 or more in mortgage insurance,” he said. “The only thing that buys you is higher repayments down the track.”

The insurance industry argues LMI covers a wider range of customers than the government guarantee, banks get greater coverage, it particularly helps smaller lenders compete in the high loan to value ratio (LVR) segment, and it transfers risk outside the banking system.

Listed insurer Helia says the government’s guarantee plans significantly underestimate the potential cost of an expanded scheme.

The industry incurred claims of almost $300 million over the past five years in an unusually benign environment, but in the preceding five years incurred claims reached almost $1.2 billion, the LMI insurer says.

“The government, and ultimately Australian taxpayers, do not need to be exposed to future claims risk from schemes where functioning private markets already exist,” chief executive Pauline Blight-Johnston tells Insurance News.

“We’ve stressed the importance of a vibrant LMI industry to the government, especially as LMI supports a wider range of borrowers than the home guarantee scheme.”

ICA general manager of regulatory and consumer policy Alexandra Hordern flagged the broader benefits last year at a Senate inquiry into home ownership and financial stability.

“An important part of LMI that is regularly overlooked is that it is, at its heart, an economic catastrophe line of insurance,” she said.

“LMI is designed to protect the banking system through major economic downturns. Through periods of sustained economic and house price growth, as has been the general trend in Australia over recent decades, it is easy to lose sight of this key function.”

The government’s plan for home loan guarantees has echoes of the past.

The Menzies government established the Housing Loans Insurance Corporation in 1965 to help people buy properties. In late 1997, a subsidiary of US group General Electric bought the corporation.

The LMI interests later became part of Genworth Mortgage Insurance Australia, renamed Helia after Genworth Financial sold its stake in 2022.

Other providers include Arch LMI – which gained Australian Prudential Regulation Authority approval in 2019 and acquired Westpac LMI in 2021 – and QBE Insurance Group.

QBE chair Mike Wilkins told the insurer’s annual general meeting that, depending on uptake, there could be some loss of revenue from the proposed guarantee changes but no significant short- to medium-term impact.

“If you look at the way in which some of the lending criteria of the banks we insure has changed over time, that revenue has come down anyway,” he said.

“We still think LMI is a good long-term product, it does enable customers that have a slightly reduced risk profile to continue to get a home loan, and we will continue to support that.”

The QBE annual report showed Australia Pacific LMI gross written premium declined 12% to $US84 million last year, “reflecting a continuation of subdued housing market activity, alongside the impact from government initiatives to support first home buyers”.

A spokesperson for the insurer says any expansion of the guarantee scheme “requires careful consideration to understand the broader system impacts, including exposing taxpayers to default risk and impacting competition for smaller lenders.

“There is also a concern this policy could drive up house prices without the issue of housing supply being addressed.”

“Housing is not just about bricks and mortar. This is the foundation on which we provide every Australian and their family the ability to build a good life.”
Housing Minister Clare O’Neil

The last Coalition government started the guarantees in 2020, with an initial 10,000 places quickly taken up.

Labor expanded it to 35,000 places, with another 10,000 targeted at regional areas. The current income caps are $125,000 for individuals or $200,000 for joint applicants. A family home guarantee has 5000 places and isn’t limited to first-time buyers.

Helia’s submission to the Senate inquiry says the scheme combined with other factors resulted in the LMI industry contracting as a percentage of all high-LVR lending, from 61% in March 2019 to 39% in March last year.

Its analysis estimates 50,000 guarantee places reduced sector revenue by about $420 million.

The Customer Owned Banking Association – including mutuals, credit unions and building societies – says the guarantee changes’ success depends on the details, including a willingness to broaden the lender panel with more customer-owned banks, and addressing other barriers.

“We are also mindful of potential impacts on the LMI market, which could reduce smaller banks’ ability to lend to low-deposit customers who cannot access the government’s scheme,” chief executive Michael Lawrence tells Insurance News.

Insurers have argued the cost of LMI could be reduced by changing rules requiring lenders to hold more capital for loans it covers compared with those for which a government or parental guarantee is in place.

The Senate inquiry’s report says the requirement is “so significant that a lower capital risk weighting for LMI-secured mortgages would easily offset the cost of the premium”. It also says parental wealth should not determine housing outcomes.

ICA’s pre-election policy wish list urged the government to work with APRA to remove the disparity.

It also says government guarantees should target those in greatest need, to ensure the scheme operates “effectively alongside the LMI industry as originally intended”.

A regulatory impact statement before the 2022 scheme expansion noted that, internationally, governments are often involved in mortgage guarantees, and it backed public and private schemes to exist at the level then proposed.

“The public provision of mortgage insurance as a means to assist low- to moderate-income earners obtain housing finance is relatively common overseas,” it said. “Indeed, Australia is relatively unique in having an active private market for LMI, at least since 1997.”

ICA says it looks forward to working with Housing Minister Clare O’Neil on the issues as debate continues on home affordability and the government prioritises helping young buyers.

Ms O’Neil told a debate at the National Press Club that Treasury advice indicates the number of people accessing home guarantees could rise from about 50,000 to 80,000 under proposed changes. The government also plans to increase property supply for first-time buyers.

“Housing is not just about bricks and mortar. This is the foundation on which we provide every Australian and their family the ability to build a good life in our country,” she said.