Mortgage experts are warning that a special offer by UBank to waive lenders mortgage insurance for home borrowers with small deposits could result in higher home loan repayments.
The NAB-owned banking brand announced on Monday that it would bin the LMI requirement for mortgage applicants with loan-to-value ratios of between 80 per cent and 85 per cent.
While the bank estimates that borrowers will save up to A$5000 on insurance costs under the waiver for an average $480,000 loan, it did not comment on the likely financial impact of charging higher rates to borrowers receiving the deal.
The UBank offer applies to owner occupiers applying for standard variable rate mortgages and three- year fixed rate loans.
UBank currently advertises rates for those products at 2.34 per cent (SVR) and 1.85 per cent (3 year fixed).
However, the bank will apply higher rates to borrowers who receive the LMI waiver, which means the $5000 benefit could be dwarfed by weightier interest payments over the life of their loans.
UBank is marketing the LMI deal for standard variable loans at 2.49 per cent and a three- year fixed rate mortgage at 2.05 per cent.
According to Canstar director Steve Mickenbecker the value of the LMI offer depends on whether borrowers are able to pay off their loans within seven years.
“On average most borrowers settle their mortgage within five to seven years, but those who are likely to take longer than that could incur interest repayments that are greater than the savings on insurance,” he said.
Mickenbecker said borrowers who felt they were likely to take longer than 10 years to repay their loans might be better off deferring entry into the property market until they had amassed a 20 per cent deposit.
“There are fewer lenders now offering discounts for low LVR borrowers, but there is a trend to loading the pricing of high LVR borrowers,” he said.
The UBank offer appears to be leveraging the recent success of the federal government’s first home loan deposit scheme, which has exhausted its capacity in the current financial year.
The Morrison Government has committed to funding another 10,000 first homebuyers under the scheme but not before the end of June.
UBank CEO Philippa Watson yesterday pitched the LMI offer as a cost saver for new borrowers.
“We know the appetite for home ownership is continuing to grow, with fifty-six per cent of Aussies who do not yet own a home excited about the prospect of owning one, up thirteen per cent since July last year,” she said.
“But saving for a deposit can make the great Australian dream seem out of reach.
“LMI can add tens of thousands to a borrower’s loan. Here at UBank, we believe it’s an extra expense our customers can do without.”