According to Refund Home Loans founder Wayne Ormond non-transferable mortgage insurance policies are what’s keeping borrowers trapped in their home loans, and not lender exit fees which have received all of the political attention from the Federal Government.
In a report to Broker News Ormond has claimed the Federal Treasurer Wayne Swan and the banks, either deliberately or in an attempt to “draw a red herring over the situation” – or perhaps through lack of understanding – have overlooked the real problem in changing banks.
“The problem is not the ‘deferred establishment’, or ‘exit’ fee, but the lack of transportability of mortgage insurance, which has not even been mentioned by either side in the argument,” Ormond said.
“The reality is that any borrower with less than 20 per cent equity in, or deposit on, their home loan is required by their lender to take out a mortgage insurance policy. Many borrowers do not understand that such policies only insure the lender against default, not the borrower,” he continued. “The mortgage insurance situation is a rort.”
Ormond said though premiums vary, they are often “quite high”, and while other policies are refundable from the insurer, banks “generally will not refund any amount” of a mortgage insurance policy. “At best there might be a partial premium refund – but that goes to the bank, not the borrower.”
Instead, Ormond said policies lapse and borrowers may be forced to take out a new policy, costing thousands of dollars. He said the situation protects the banks and lenders, but not the borrowers.
Ormond argues mortgage insurance should be made transportable. “Borrowers should not be forced to take out a second policy when the original policy lapses because the homeowner has switched lenders,” he said.
Last week, the Insurance Council of Australia responded to criticisms raised byAustralian Broker readers that LMI could be acting as a bar to refinancers, saying this was not always the case. “We do not believe LMI is a bar to refinancing,” said a spokesperson for the Council. “LMI may or may not be required by an incoming lender. If the lender does, then an additional premium is payable and the LMI provider is required by regulation to set aside new capital for that loan.”
The spokesperson added that the way LMI is calculated in a refinance situation is down to the fact that it insures the lender, not the borrower.
“A LMI policy is provided to protect the lender in the event a borrower defaults on a residential mortgage loan. It is the lender’s policy, not the borrower’s policy, and as such can not be transferred by the borrower,” added the spokesperson.
ASIC recently released guidelines for lenders on exit fees. However Ormond said this misses the point.
“While both the Treasurer and the banks seem to be moving to a mutual agreement on a politically driven solution of dropping exit fees to make it easier for customers to change banks, neither side is really thinking it through and reveal a depth of knowledge of the industry that is frankly alarming – as well as failing the home buying aspirations of thousands of young Australian families.
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