A relatively unknown insurance premium may be having a major impact on home buyers with deposits of less than 20% - and can leave buyers paying significantly more in repayments as a result. However, with lower deposit thresholds and more New Zealanders vulnerable to higher mortgage rates, having a certain policy in place may be increasingly vital for many lenders.
Lenders Mortgage Insurance (LMI) is an insurance policy which has flown relatively under the radar, and is designed to protect lenders from financial loss in the event of a borrower being unable to keep up their home repayments. Lenders often use the policy as a condition of a high LVR loan, with the borrower being responsible for the cost of premiums.
“LMI can come in the form of a margin applied at a negotiated rate, or in a one-off fee form,” explained Canstar general manager Jose George. “The Reserve bank has made it very clear that it’s not a requirement for a lender, and so it falls to them to decide how big the risk is when it comes to lending below the 20% level. That then determines how they estimate the risk of default, and what they want to charge for it.”
“We’ve seen some lenders in the market who don’t believe it’s important for them to charge, whereas others see that there is a clear additional risk,” George continued. “We’ve also seen from Reserve Bank statistics that there has been a growth in first-home borrowing and lending in the under 20% deposit space, and there have been more buyers who have been able to leverage that relaxation.”
The Reserve Bank estimated last year that New Zealand is particularly vulnerable to a sharp rise in mortgage rates, and an unexpected upsurge in global interest rates or a change in investor appetite would lead to financial instability, potentially causing more borrowers to default. Auckland borrowers appear particularly vulnerable to increased mortgage rates, and were estimated to face “severe stress” if rates rose to 7% or above.
According to George, the risk of default can be difficult for a lender to estimate. On the customer side, buyers should ideally have access to a minimum 20% deposit to avoid having to bear the cost of insuring a lender against a potential default.
“Getting a good deal on your home loan rate is always important, but, for borrowers, there’s a lot more to consider,” he says. “We recommend that consumers get as much advice as they can, so that they can make an informed decision.”
