Mortgage insurance, or lender’s mortgage insurance (LMI) as it is known, is often the most prohibitive factor in stopping people from switching between lenders.
Aussie’s founder and executive chairman John Symond said homeowners who borrow more than 80 per cent of the value of their property are subject to LMI, which insures the lender – not themselves – should there be a default on the loan.
“When you take your loan away from one lender, the mortgage insurance contract ends,” he said. “You then have to take it out again when you sign up with another lender, so you’ve effectively been hit with it twice.”
“LMI can run into thousands and thousands of dollars, and that’s the real reason why it can be difficult to switch lenders – particularly when you’ve borrowed more than 80 per cent of the loan.”
Mr Symond said the attention focused on exit fees has been misguided.
“There are costs involved to lenders when setting up loans which include property valuations and the drafting of loan documents, which are often completed by a lawyer,” he said.
“Instead of charging for this upfront, banks absorb it into the life of a loan and if you decide to exit early that’s when you’re charged these fees.
Mr Symond said these costs have to be recouped somehow, so abolishing exit fees may mean they are charged to the customer in another way – such as higher interest rates.
“Abolishing exit fees won’t be the game-changer that many think it will be.”