Regulatory moves to limit riskier home loans is shaving demand for mortgage insurance.
And this means profits at mortgage insurance group Genworth are being squeezed by a shrinking number of home loans with a high loan-to-value ratio.
The company says it expects gross premiums this financial year to be 10% to 15% lower than in 2016. Mortgage insurance, usually demanded by banks from borrowers with only small deposits, protects lenders if there’s a default in a home loan.
And Genworth expects house price growth is likely to moderate in 2017 following regulatory measures to slow growth in investor lending and limit interest-only loans.
“Recent mortgage interest rate increases, particularly for investor loans, may also impact price growth this year,” says Genworth.
In a report on the first quarter, Genworth’s net earned premiums fell 4.9% to $113.5 million and net profit after tax was down 22%.4 to $67.3 million.
Underlying net profit after tax, which includes $21 million in gains following a rebalancing of the investment portfolio, was up 10.7% to $68.3 million.
CEO Georgette Nicholas says profitability is strong despite revenue being pressured by a smaller high loan-to-value ratio (LVR) market.
Here’s how Genworth sees the decline in high loan-to-value mortgages:
“Australian regulators have taken further steps recently to reinforce sound housing lending practices, with a particular focus on slowing the growth in investor lending and limiting the flow of new interest only lending,” she says.
“We are supportive of regulatory measures that promote prudent mortgage lending standards and ultimately foster long-term sustainable credit growth.”
Genworth says its business in New South Wales and Victoria is performing strongly.
However, Queensland and Western Australia are challenging with higher loan delinquencies due to the economic slowdown after the end of the resources boom.
Overall, the number of claims on mortgage insurance are increasing. In the first quarter, there were 356 claims paid compared to 280 in the same three months last year.
The average payout has jumped to $92,500 from $65,800 a year ago.