Struggling homebuyers are being forced into bankruptcy over mortgage insurance policies that most consumers believe are designed to protect borrowers.

Key points: Mortgage insurance protects lenders not borrowers in the event of default

Mortgage insurance protects lenders not borrowers in the event of default Some borrowers have been forced to declare bankruptcy after being pursued by insurance providers

Some borrowers have been forced to declare bankruptcy after being pursued by insurance providers Calls for changes to the way mortgage insurance is disclosed

Australia's two big mortgage insurance providers, QBE LMI and Genworth Financial, have launched bankruptcy proceedings in the Federal Court against dozens of homebuyers over the past decade to recover debts from mortgage defaults.

Australian banks have made lenders mortgage insurance (LMI) compulsory for all borrowers who do not have a 20 per cent deposit.

Helen and Joe Tollan discovered they owed $87,000 to QBE LMI when they defaulted on a loan five years ago.

"We just thought if they took your property … your money is already paid," Ms Tollan told 7.30.

They managed to avoid bankruptcy, but have reached an agreement to pay back QBE LMI $450 per week for the next five years.

"We can't pay our own bills, the electric and the gas is always behind because we can't afford to pay it," Ms Tollan said.

"They've left us with nothing."

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Mortgage insurance protects the lender, not the borrower

Mortgage insurance protects lenders against a mortgage default, not borrowers. ( 7pm TV News NSW )

In the first half of this year, borrowers spent almost half a billion dollars on about 100,000 lenders mortgage insurance policies, according to figures from the Australian Prudential Regulation Authority.

Many consumers believe they are signing up for a policy that protects them if they default on the loan.

But the policies, which typically cover borrowers up to $40,000 on top of their mortgage, are designed to protect the bank in the event that the borrower defaults.

"Around 70 per cent of households believe that lenders mortgage insurance protects them rather than the lender," said independent banking analyst Martin North, who runs a rolling survey of banking consumers.

"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."

Under the terms of most lenders mortgage insurance policies, a bank can make a claim if a borrower defaults and the sale of the property does not cover the value of the mortgage.

"The insurer pays the bank, so the bank gets out scot-free," said Peter White, president of the Finance Brokers Association of Australia.

"But what that loss was — [the insurers] then chase the borrower to recoup.

"That could be $100,000."

QBE LMI and Genworth Financial declined 7.30's requests for interviews.

Mortgage insurance details 'buried in terms and conditions'

QBE LMI is one of the main providers of mortgage insurance. ( AAP: Paul Miller, file photo )

In a statement, the Australian Bankers Association said borrowers were made aware of the risks of lenders mortgage insurance.

"LMI would typically be discussed with customers when they initially apply for a loan, be included as part of information packs, and discussed again at the final stage when the customer proceeds to purchase," the statement said.

"The terms and conditions of LMI are included in the loan contract."

Peter White from the Finance Brokers Association of Australia wants the Federal Government to intervene and improve disclosure to make sure borrowers understand how lenders mortgage insurance works.

He said the details of the policies were "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," he said.

"And it being at the beginning of the process maximises the opportunity of understanding."