Reaching out to new borrowers
With the cost of living an ever-present concern, being able to reach out and provide finance and support to all market segments, particularly those with little immediate capital, is important for brokers. Lenders mortgage insurance (LMI) providers are the key to accessing these borrowers.
“The first homebuyer market is a key segment within the high loan-to-value ratio (LVR) space and within the broker market,” says Paul Caputo, chief risk officer at Genworth. “It’s fundamental – by getting into your home earlier, it allows individuals to build up equity faster.”
LMI allows borrowers, who may have previously been seen as unviable candidates, to secure loans, while the LMI provider absorbs the risk in the event of default. In this way, it opens the market to an untapped pool of homebuyers, by providing them with loans averaging 97 per cent of the property’s value.
“LMI is about allowing individuals to get access to low-deposit lending,” says Caputo. “A broker is about servicing as broad a customer base as they can in getting into their homes, whether it be the first homebuyer market, investors or upgraders.”
Ian Graham, CEO of QBE LMI, agrees, stating that the benefits to low-deposit borrowers are invaluable.
“It actually gives them access to finance at very competitive terms,” he explains. “Somebody with a low deposit, less than 10 per cent, gets the same competitive interest rate as someone who has a 50 per cent deposit.
“Lenders are able to do that because we take the risk.”
Due to their lack of access to immediate capital, first homebuyers are the key demographic for LMI providers. Caputo says lenders should be offering these borrowers LMI so they can achieve the dream of home ownership sooner.
“Do you keep trying to save a deposit of 20 per cent – even though you’re in that rental trap… which keeps making it harder and harder – or use LMI to get into that home much sooner and then build equity as housing prices continue to appreciate over the medium- to long-term,” he says.
The best example of LMI’s success rate, says Graham, is the First Home Owner Boost Scheme in 2009. Of the 190,000 loans made to first homebuyers, more than 50 per cent of those were made possible due to LMI support.
“The whole success of the government’s program, indirectly or directly, was very much dependent on mortgage insurers being willing to accept the risk,” he says.
“This has been the biggest surge in the first homebuyer market. Effectively, what it did was bring forward a 12-month demand so first homebuyers who may have considered buying in 2010, actually brought forward their decisions to 2009.”
Though the first homebuyers market segment has been waning since 2009, it is still a sizeable market to be servicing, says Caputo.
“They still make up 18 or 19 per cent of the total originations. In 2009, they were up to 30 to 33 per cent,” says Caputo. “With our population growth, it’s continuing to be a quite sizable market.”
As rents continue to increase and with the threat of interest rate rises, the need for LMI has never been stronger.
“The key issue emerging is home affordability,” he says. “Home affordability is obviously being driven by the strong home price appreciation that we’ve seen over the last 12 to 18 months, coupled with rising interest rates.
“That is obviously making it harder for people to get into the housing market and this is a great opportunity where LMI is exactly placed to assist with the affordability issue,” he says.
“Rents are continuing to be under pressure and will continue to rise, due to the undersupply of housing across all capital cities,” he says. “I think that it will continue to show the value that LMI does play within the mortgage market.”
Published on: Wednesday, October 27, 2010