Lenders Mortgage Insurance (‘LMI’) – the real reason why many borrowers can not refinance to a cheaper interest rate

 After the recent decision by the major banks to lift interest rates above the Reserve Banks cash rate, the government has responded with measures designed to make it easier for customers to change lenders.

These measures have operated to reduce early exit fees which generally cost around $700 when the loan is paid out in the first 3-4 years. However, the problem is not the early exit fees but rather the non transportability of Lenders Mortgage Insurance which has not even been mentioned by either side of politics 

Lenders Mortgage Insurance is charged when a borrower has less than a 20% deposit or equity in their existing property. It is a once off upfront fee and is designed to protect the lender against a bad debt. There are two lender mortgage insurers in Australia being Genworth and QBE and different banks will use one of these two insurers. 

The issue arises for borrowers when they want to refinance without having 20% equity in their home as they will be required to pay lenders mortgage insurance with the new lender.

For example: If a customer had a loan with the Commonwealth Bank  they most likely would have paid lenders mortgage insurance when they first purchased the home (presuming they did not have a 20% deposit).  If they now wish to refinance to a bank with a cheaper rate and have not built up 20% equity, the borrower will be required to pay the LMI again to the new lender. This is the case even if the Lenders Mortgage Insurer is exactly the same insurer that is already insuring the Commonwealth Bank loan. Ie, if the refinance was from CBA to ING, both CBA to ING use Genworth as their mortgage insurer. 

Neither side of politics have commented on this and for many people, the non transportability of LMI is the real bar to refinancing. It is submitted that if its the same mortgage insurer with no increase in loan amount and no change to borrowers or security, then LMI should be transferable from one lender to another. 

With LMI costing anywhere from a few thousand to $10,000, borrowers looking to refinance need to ensure they are not again paying LMI, and if they are, that the interest rate saving makes it worthwhile.