Redefining mortgage protection for today’s housing market challenges

The Australian Prudential Regulation Authority (APRA) recognises the benefits of mortgage insurance.

Mortgage insurance contributes to the stability of the financial system and as a result provides explicit capital recognition of this benefit in the prescribed credit risk weights applied to the standardised lenders.  This means that smaller lenders can hold less capital for these risks than would otherwise be the case for such loans without the benefit of mortgage insurance.  This combined with the effective risk diversification increases their competitive position against the major banks.  The support provided by mortgage insurance is significant for small and regional lenders as they cannot carry as much risk on their balance sheets as larger ADIs. 

The availability of mortgage insurance helps smaller lenders compete with larger lenders (i.e. the major banks) which would otherwise enjoy a competitive advantage in the high LVR segment from having the balance sheet capacity to self-insure and the benefits of a model-based approach for regulatory capital.  This is particularly important for smaller lenders with geographic concentration where mortgage insurance plays a critical role in enabling them to expand their lending across, for example, regional and rural Australia. 

Non-authorised deposit taking institutions (such as lenders that are not regulated by APRA) also use mortgage insurance widely when offering high LVR mortgages in Australia and to access funding at a lower cost.

Mortgage insurance provides credit enhancement which underpins the mortgage-backed securitisation market, enabling non-bank lenders to access funding at competitive rates. Most importantly securitisation promotes competition in the home lending market, enabling non-ADI lenders and smaller ADIs to compete with mainstream lenders on pricing and other features.