Lenders Mortgage Insurance (also known as LMI)
It is very common that people don’t understand what Lenders mortgage insurance is and who it covers. It is important not to confuse lenders mortgage insurance to mortgage protection though which is something some people do.
Lenders Mortgage Insurance is insurance that protects the lender if you default on your home. If you are unable to pay the loan and the lender cannot recover all it’s costs for the loan then they will make a claim with the lenders mortgage insurer. Lenders mortgage insurance is payable by clients who borrow over 80% of the value of a property for a fully verified loan (with payslips/ tax returns) or over 60% for low doc loans (Self certifying income). It can generally be capitalised onto the loan depending on the lender and is a one off payment based on the fact that you will not refinance/ increase the loan while the loan is over 80% of the value of the property. If you refinance a loan while the loan is over 80% of the value with another lender you can be charged lenders mortgage insurance again. There is an opportunity to refinance and have some of the original lenders mortgage insurance refunded but this is at the discretion of the mortgage insurer.
There are only a few lenders mortgage insurers in the market and it depends on what agreement the lender has with their mortgage insurer as to the premiums charged and which insurer is used for a loan. Lenders mortgage insurance premiums can differ from lender to lender so it is very important to look into this when choosing a home loan.
The history of mortgage insurance is that prior to this insurance being available, lenders would only lend up to 80% of the value of a property. As a result of increasing housing prices it was becoming apparent that more and more of Australians were not able to purchase their great Australian dream as they had to try to save 20% of the value of the property as well as cover all government fees and legals (stamp duty and all costs associated with purchasing). Therefore they introduced this insurance to allow people to purchase properties for a smaller deposit and, although they pay a premium, they would achieve their desired outcome of home ownership.
Some clients will ask me if it’s worth waiting to save the full 20% plus purchasing costs to avoid paying lenders mortgage insurance? Saving the full amount to cover this can literally take years. For example, if you were to purchase for $450 000 you would need $90 000 to cover just the 20% deposit and this doesn’t even take into account the government fees and purchasing costs (stamp duty and conveyancing fees etc) which can equate to another $25 000. Therefore, for a lot of people lenders mortgage insurance is their best and only option. On the basic assumption that property will increase at around 5% per year the lenders mortgage insurance can become a small price to pay when you calculate the equity you can possibly be achieving as well as having the opportunity to pay down the home loan as fast as you can rather than trying to save that massive deposit!
Lenders Mortgage Insurance is calculated on a tiered effect. If you borrow up to 95% of the value of the property you will pay more than if you were to borrow only 85% of the value of the property.
If you obtain lenders mortgage insurance with a lender it can affect your interest rate with that lender. A lot of lenders are quoting interest rates based on their risk and therefore the higher the loan to value ratio (LVR) the higher their rate can be. However, I do believe that rates are only a part of the overall equation with purchasing/ refinancing/ consolidating. Therefore it is very important to look at the overall option rather than just trying to go for the cheapest rate. Cheapest does not necessarily mean the best!
The mortgage insurers will need to approve your loan if you are requesting a loan over 80% of the property valuation. They can be more pedantic and harder to obtain approvals from as they are more conservative but if you have a stable employment history, a savings record whether it be in form of shares/cash/ equity then this is a big help to you obtaining approval. Some lenders do have the authority to approve loan applications on behalf of their mortgage insurer so this can save headaches and heart ache.
If you would like further information on any of the above information, speak to us regarding your loan, or have any general queries regarding purchasing/ refinancing/ consolidating we’ll be happy to assist you with your finance needs. Just call our office on 9020 1420 or Danielle on 0425 726 419 and we’ll be happy to assist.