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Lenders Mortgage Insurance (LMI) is a type of insurance that protects the lender from borrowers defaulting on home loans.
It is a one-off, upfront premium that is typically required when you borrow more than 80 per cent of a property's value.
As part of the government’s Home Guarantee Scheme, 50,000 first home buyers each year have been able to access 5 per cent deposits on home loans without paying LMI.
The government guarantee the extra 15 per cent, pushing out the need for LMI providers on these types of loans.
The scheme is now expanding. From 1 October, unlimited first home buyers will be able to access 5 per cent deposits.
There will be no income caps and property price caps will be set higher in line with average house prices.
The noise surrounding the news and the removal of caps will see far more people taking advantage of the scheme to try and break into the property market.
This is set to take further business from LMI providers and raises a question of ethics with the government bypassing established structures in implementing legislation.
When the government is competing with a well-established and niche industry like LMI, the delicate ecosystem could be disrupted and have a ripple effect for borrowers, lenders, and the property market.
Without LMI to protect them, banks would become extremely risk-averse and would likely raise the minimum deposit requirement, sparking the end of low deposit loans.
This would force borrowers to save for much larger deposits impacting their ability to enter the property market.
The industry is already underrepresented. There are only two major independent LMI providers in Australia: Helia and QBE.
As Australia’s first LMI provider Helia has been in market since 1965. This latest news could place more strain on the sector than ever before.
A spokesperson at the company said the expansion of the Home Guarantee Scheme will further reduce LMI provider premiums and make it more difficult for LMI providers to maintain critical mass to support lenders and borrowers.
A functioning high LVR market is best supported if public and private solutions such as LMI work together, said Helia.
“Government schemes should be targeted at those who are most in need of public support into home ownership. The removal of income thresholds and very significant increase in property price thresholds gives tax-payer funded support to wealthier borrowers,” said the Helia spokesperson.
Helia specialises in LMI and LMI only. If the government begins to take market share from half of the independent providers.
While the 5 per cent deposit scheme is well-intended, the consequences could disrupt the balance of the industry.
FirstPoint Mortgage Brokers’ director Troy Phillips believes the outcome of this squeeze could resign LMI providers to dealing with loans between $1 million and $3 million.
He said the scheme is unlikely to completely push out LMI providers but will dent volumes. If they’re to survive, they’ll need to rethink their proposition.
“The scheme effectively makes the Commonwealth the ‘back-stop’ for a big chunk of high-LVR, first-home-buyer lending—historically the LMI sweet spot,” Phillips commented.
“LMI has already been trending less central than it was pre-GFC when it doubled as credit enhancement for securitisation. The scheme accelerates that shift.”
The future of LMI providers is dependent on how they adjust to this shift. Phillips said there are four key focus areas that will pull these companies through:
- Refocus on segments outside the guarantee: Investors, self-employed/alt-doc, regional and jumbo loans where banks still value risk transfer.
- Move up the stack: Portfolio-level covers, lender-paid models, capital relief solutions aligned to APRA settings rather than retail borrower-paid LMI only.
- Broader risk services: Hardship/arrears toolkits, loss-mitigation analytics, and data partnerships that help lenders reduce LGD—not just insure it.
- Product innovation: Risk-based pricing, shorter-tenor/top-up covers, and complementary protections (e.g., income-shock/payment cover) that actually solve today’s pain points.
LMI providers are set to release statements regarding the expansion of the Home Guarantee Scheme today.
[Related: Lack of clarity raises concerns over government's 5% deposit scheme]
