LENDERS MORTGAGE INSURANCE (LMI) – FACT VS FICTION

Along with stamp duty, the single biggest expense in buying a property can be lenders mortgage insurance (LMI).

When purchasing a property, the lenders normally require the purchaser/borrower to have a deposit, (or equity in another property) totalling 20% of the purchase price and fees.

For example, on a $400,000 purchase the lender would require the purchaser/borrower to have an $80,000 deposit plus fees.  That is, the loan amount in this instance would be $320,000.

There are very few 1^st homebuyers who have managed to save a 20% deposit + fees.

All is not lost.   In the example of a $400,000 purchase, if the lender can get a mortgage insurer to insure the home loan and the borrower pays the LMI premium, the required deposit can fall to as little as 2% plus fees, i.e. $8,000 plus fees.  In this instance the loan amount would be $392,000.

 Obviously if would be easier for the purchaser/borrower to come up with a 2% deposit as opposed to a 20% deposit.

When the purchaser/borrower has less than a 20% deposit and costs and wants to purchase a house they have to pay an LMI premium.

The lender is insuring your loan and you the borrower are paying the lenders insurance premium.

Who is Lenders Mortgage Insurance protecting?

Many borrowers believe that the LMI premium protects them should they not be able to make their mortgage repayments due to sickness, accident, unemployment and the like.

This is not the case and borrowers need to be very clear on this.

The LMI policy protects the lender from loss and only the lender.

When a lender is presented with a home loan application with a 2% deposit, they assess it from a position of ‘worst case scenario’ and rightly so. 2% equity in the transaction does not leave much wriggle room.

When we say ‘worst case scenario’ when assessing a home loan application involving LMI, the lender assumes:

• What if after settlement the borrower gets behind on their loan repayments
• What if after settlement the property goes down in value
• What if after settlement the lender has to sell the property to get their money back.  In this instance the lender would have to pay a real estate agent.

A combination of the above factors may see the lender realise less from the sale of the property than what is owed on the loan.

The lender makes a loss on that loan.  In this instance the lender would claim the loss from the mortgage insurer and the mortgage insurer would cover the loss the lender made on that home loan.

The mortgage insurer would then chase the defaulting borrower for the loss. So, you the borrower pays the lender’s insurance premium to protect the lender from a loss on your loan.

And if there’s a loss the mortgage insurer will chase you for it!  So, if you have less than a 20% deposit and fees you are more than likely going to pay LMI. 

The LMI premium can run into thousands and thousands of dollars.

Generally, once you pay the LMI premium you will more than likely never pay it again.  Bur you can be charged LMI again if you want to top your home loan in the future or if you want to refinance to another lender.

Considerations for LMI

At Better Choice Mortgage Services, we have one and only one lender that does not charge LMI.  The trade-off is that they charge a higher interest rate.

The other things to be aware of with LMI:

• Requirement for the borrower to have genuine savings.
• Importance of a clean credit history
• Importance of avoiding too much short-term debt, e.g. credit cards, after pay and personal loans
• You the borrower don’t make the decision as to whether the mortgage insurer will insure your loan.  The mortgage insurer decides as to whether they are prepared to insure your loan.  In essence, the mortgage insurer is approving or declining your loan application.
• There are only two main mortgage insurers in Australia, Genworth and QBE.
• A few lenders have established their own mortgage insurance subsidiaries, i.e. Westpac, St George and Macquarie.

Your Better Choice Mortgage Broker can figure out whether you need to pay an LMI premium or not. 

Contact Better Choice Mortgage Services anytime at betterchoice.net.au or email bdm@betterchoice.net.au or find us on Facebook.

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