The Insurance Council of Australia (ICA) has raised concerns about the potential consequences of a Labor proposal to extend government-backed home loan guarantees to all first-time buyers with low deposits.
It warned that such a shift could impact financial stability and weaken a key segment of the insurance sector.
The proposed expansion of the Home Guarantee Scheme, according to the ICA, could significantly reduce demand for lenders’ mortgage insurance (LMI), a product that has been part of Australia’s housing finance system for nearly six decades.
LMI allows borrowers with smaller deposits to access loans while providing risk protection for lenders, thus helping to manage systemic risk.
The ICA stated that redirecting the risk associated with low-deposit loans from private insurers to the public sector may place substantial financial exposure on the government, particularly in the event of a housing market downturn.
“Labor’s announcement contains significant risks to the stability of the financial sector and the ability of many Australians to access the home market,” said ICA chief executive Andrew Hall.
He argued that while the intent to support first-home buyers is understandable, such policies should be carefully targeted to those who are genuinely unable to access home ownership through existing channels.
Hall said broadening the scheme to all first-home buyers, including those with stable incomes and significant savings, undermines the original purpose of the program.
“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,” he said.
The ICA recommended that eligibility for the guarantee be focused on groups with the greatest barriers to home ownership, such as single-parent households, regional workers, and key service providers. The organisation also urged that new housing developments avoid areas at high risk of flooding or extreme weather events.
Separately, the ICA voiced its support for a federal Coalition proposal to reform how the Australian Prudential Regulation Authority (APRA) calculates capital requirements for home loans insured by LMI.
The change, included in the Coalition’s election platform, seeks to ensure that LMI-backed loans are not disadvantaged compared to loans guaranteed by parental support or government programs.
Currently, loans underwritten by LMI face different capital treatment than those secured by government or family guarantees. The ICA has advocated for a more consistent regulatory approach, which it says would improve fairness and increase access to credit.
The recommendations were detailed in the ICA’s recent policy agenda, “Advancing Australia’s Resilience,” which outlined priorities for strengthening the role of insurance in the financial system and promoting housing market resilience.
With the election approaching, the ICA has indicated it will continue to engage policymakers from across the political spectrum to discuss the implications of proposed housing finance reforms.
“The insurance sector looks forward to engaging with Labor if it is returned on 3 May and raising the significant concerns we have about this proposal,” Hall said.
