As Australia’s mortgage insurance providers force struggling homeowners into bankruptcy, a bank analyst has revealed that most Australians don’t understand that their policies favour lenders, not borrowers.

Over the past decade, QBE LMI and Genworth Financial – Australia’s two main mortgage insurance providers – have launched bankruptcy proceedings against dozens of homebuyers to recover debts from mortgage defaults.

According to figures from the Australian Prudential Regulation Authority (APRA), borrowers spent almost $500m on about 100,000 lenders mortgage insurance (LMI) in the first half of the year. LMI is compulsory for all borrowers who do not have a 20% deposit.

However, borrowers have a different understanding on what a mortgage insurance policy does.

“Around 70% of households believe that lenders mortgage insurance protects them rather than the lender,” banking analyst Martin North told ABC.

“So it’s not totally clear to them that this is something that protects the bank rather than the borrower and I personally think that there needs to be better disclosure with regard to this particular product set.”

Finance Brokers Association of Australia Peter White also explained how an LMI works.

“The insurer pays the bank, so the bank gets out scot-free. But what that loss was – (the insurers) then chase the borrower to recoup,” he said.

Though the Australian Bankers Association claims that the risks of an LMI are divulged to the borrower upon initial loan application, White called for improved disclosure of the policies often “buried in the terms and conditions.”

“Make it a regulated document that every banker and every broker must give to the client and the client needs to understand,” said White.