NEWS ANALYSIS / LMI
25% 20% Market penetration LMI penetrates 20% of all loans written in Australia, according to Peter White from the FBAA. “When the FHOG is running hot,” he says, “it bumps up to 25% of market share. That’s a hell of a lot of loans”
AVERAGE LMI PREMIUM – $500,000 PURCHASE Loan amount
LVR
Premium
$425,000
85%
$4,400
$450,000
90%
$7,900
$475,000
95%
$15,700
Source: www.yourmortgage.com.au/calculators/mortgage_insurance/
could drive down that highway and get to your end destination by weaving and ducking and diving along those three lanes,” Carlson explains. “Now they’re called credit policies, which means it’s a much straighter route. If an application doesn’t tick a box, it’s deferred or declined, no further discussion.” Housing affordability is also getting tougher for new entrants, and new homes aren’t being built at the same rate because of land availability, Carlson adds, which is prompting new entrants to buy into newer, higher-density complexes. This is where things start to become complex. With only two major LMI insurers in the market, risk can only be spread so far, and in any particular 12 | AUGUST 2014
building, street, suburb or neighbourhood, they are determined to limit their risk exposure. “Genworth and QBE LMI talk to each other and they know pretty much down to the street level how much LMI exposure exists in each area,” Carlson says. “They will only take a concentration level of 30% inside any suburb or even that building, so if they’ve got more than one-third LMI exposure, the loan is declined – it’s that simple.”
HOW INSURERS ASSESS LOCATION RISK Level 1 – Region This takes into account the state or territory, nearest capital city, the local population and the percentage of mortgage-insured homes in the area. Level 2 – Postcode If the region’s exposure is less than 30%, the insurer drills down further to assess the postcode. If an applicant wants finance to buy a property located in an undesirable or overexposed postcode band, “it doesn’t even get past this point”, Carlson says. Level 3 – Street Assuming the postcode is deemed acceptable, insurers will assess the street to ensure it stacks up from a risk perspective (think: crime rates, historical growth, average incomes, etc.) before checking the street’s LMI concentration. Level 4 – Building For purchases of apartments and townhouses, insurers will also assess the building’s LMI exposure. “The suburb might not have an issue,” Carlson says, “but if that particular building has already reached 30%, that’s too bad.”
HOW CAN BROKERS GET LMI DEALS APPROVED? First and foremost, as a broker it’s your responsibility to be aware of potential LMI red flags, so that when you have a client looking to borrow over 80% of a property’s value, you can make them aware of any potential issues that could derail their loan application. It’s ideal if you can have this conversation before they settle on their dream property. “Each insurer may look for slightly different things; QBE LMI might accept something as reasonable that Genworth may not. But, generally