If you’ve ever made an inquiry about getting a home loan, then you have probably heard the term lenders mortgage insurance or LMI as it is more commonly referred to. So what is it and what does it cost?
Lenders mortgage insurance is a form of insurance taken about by banks. It provides protection to the bank/lender in the event that you or default on your home loan. Whenever you borrow more than 80% of the value of the property, that is being offered as security for the loan, the bank passes the premium onto you, the borrower. There are two providers of lenders mortgage insurance in Australia, Genworth, and QBE LMI. Most lenders use these providers with the exception of a couple of the major banks that self insure.
So how much does it cost?
The cost will depend on a number of factors. These factors include the base loan to value ratio (loan amount divided by the value of the property), the size of the loan and the lender – as every lender has a different risk profile. Generally, the higher the base loan to value ratio and the bigger the loan amount the higher the premium will be.
When do you pay the premium?
The premium is paid at settlement of the purchase or refinance. It’s a one-off premium that is usually added to the loan amount. Most lenders cap the maximum loan amount including the LMI for an owner-occupied home at 95% of the purchase price or property valuation whichever is lower. For investment purchases, this is usually 90% including the insurance. There are a few lenders that will allow LMI above this but expect to pay a significant interest rate premium if you consider this option.
Other important information
It is important to note that despite the borrower paying the premium, it provides no protection to the borrower. If you default on your loan and the bank does not recover sufficient money from the proceeds of the sale of your property to cover what you owe them, they will claim on this insurance. The insurance provider will pursue you to recover their money – all the way to bankruptcy if required.
LMI once paid applies to the loan for the life of the loan whilst ever it remains with the lender who took it out. Lenders mortgage insurance is not transferrable from one lender to another and is usually not refundable.
You can apply to increase the loan amount on an insured loan. When you do this you will be required to pay an additional premium but that premium is likely to be significantly less than if you refinanced to another lender and had to pay the full premium again.
How can you avoid lenders’ mortgage insurance?
The most common way to avoid lenders mortgage insurance is to have a deposit that is sufficient to cover a 20% deposit for the purchase and the costs associated with the purchase.
For Australian Citizens, the Federal Government offers the First Home Buyers Home Guarantee Scheme which allows eligible first home buyers to borrow 95% of the purchase price without the need to pay lenders mortgage insurance. Spots in this scheme are limited and eligibility criteria apply.
A family guarantee. This is where an immediate family member offers their property as additional security for your loan. No all lenders offer a family guarantee and all those that do have eligibility criteria that must be satisfied before a guarantee can be taken.
If you are considering buying a home and wish to discuss your situation please give Margaret Godfrey, Mortgage Broker Newcastle a call on 0451 471 061 or email her at firstname.lastname@example.org