Lenders Mortgage Insurance Overview
One of life’s most exciting achievements is to become a homeowner, but the challenge of saving up enough money for a deposit is delaying home ownership for many. Typically, banks and other lending institutions require purchasers to stump up a deposit of 20% or more – a daunting prospect in this still tough and volatile economic climate.
However, there is some welcoming light at the end of the tunnel. With a Lenders Mortgage Insurance (LMI), it is possible to buy a home, even with a small deposit. That’s because the policy protects the lender in the event of borrowers not meeting their payments. With this backing, lenders have more confidence in offering home loans.
What exactly is Lenders Mortgage Insurance?
When lenders loan money, there is always a risk that they may not get it back if the customer is unable to meet their repayments. LMI is an insurance policy that protects the lending bank or financial institution against potential financial loss in the unfortunate event of homeowners being unable to repay their loan. It provides them with safeguards and security, taking away a lot of the risk. The insurance gives lenders more confidence to lend to a broader range of borrowers.
So the lender is insured?
That’s right. The policy covers the lender when they take an increased risk with a loan; it does not cover the borrowers or any guarantor. They are taken out by banks, building societies, non-bank lenders and credit unions. Don’t confuse LMI with mortgage protection insurance, which covers you personally and your repayments if you become, sick, disabled or pass away.
You mentioned increased risk, what do you mean by that?
Ideally, lenders want to see a deposit of at least 20%. If the borrower defaults on the mortgage and the house needs to be sold, the lender can still get 80% of its value from selling the property. So, they won’t lose anything on the loan. Providing a mortgage to someone who has paid less than 20% deposit poses a greater risk.
So, err are there any benefits for borrowers?
This is another cost that you will have to budget for when buying a property. There is something in it for you. The biggest benefit is that if you don’t have the full deposit, you can still get money from a bank to purchase a property, getting onto the property ladder sooner than you may have expected. If LMI did not exist and you did not have the 20% deposit you would struggle to get a loan. Also, by passing on the risk to an insurance compay, lenders are able to minimise their lending interest rates.
How much does a LMI policy cost?
The cost is variable, depending on several factors.
The size of the loan – the more money you borrow the greater the risk for the lender if you are unable to pay. This will reflect a higher premium.
The size of the deposit – in other words, your loan-to-value ratio (LVR). Generally speaking, the higher the LVR the more you will need to pay. So, if your deposit is only 5% or 10%, the premium is also going to be higher, because in making a larger loan the lender feels they are taking a greater risk. And the larger the risk a bank feels it is taking, the larger the insurance is going to be.
Whether you are living there – lenders and their insurance policy providers think it is less likely that homeowners will default if they are living in the property.
Your employment status – whether you are a full-time or casual employee. Your emplyment status affects the risk of lending money to you.
Other factors include whether or not you are applying for the First Home Owner Grant (FHOG) and whether you have a genuine reserve of savings.
Search online for an LMI calculator or estimator to find approximate costs. There are several available on the web and they’ll ask you to input criteria such as the loan amount, the length of the loan, the property value and the size of your deposit.
It is worth noting that LMI varies from lender to lender. You may go to several with the same loan value and the same deposit size yet receive different figures from each. Therefore, it is a good idea to get a quote from different lenders.
When do I pay the premium?
LMI premiums are a one-off payment. The premium is payable at the time of lending. What happens is that the lender’s mortgage insurance provider charges the lender who passes the cost onto you, the borrower. The lender pays the premium directly to the insurer on your behalf.
You have two payment options when it comes to settling the premium. You can either pay as a lump sum or add it to the principal of the loan. This is useful if you don’t have a few thousand dollars lying around, but it also means you’ll be paying the LMI back with interest.
Are GST (goods and services tax) and stamp duty payable on the LMI premium?
GST Tax is payable on all LMI premiums. The tax payable will be in the insurance quote. Stamp duty is also payable. The stam duty percentage varies according to the state or territory.
Should I wait until I have a bigger deposit or pay the insurance?
There are pros and cons to both of these approaches, but every person’s situation is different and the answer to this question depends on so many things. Your iMortgage Broker will be able to discuss all the options available and applicable to your personal situation.
Is there any way I can avoid paying LMI?
Put down a sizeable deposit – in some circumstances you may be able to avoid paying LMI altogether. For example, if you have a deposit larger than 20%. The more you can pay up front the less a bank will have to lend to you which lowers their risk. The big advantage of not having to pay for LMI is that you can make a huge saving.
Go the bank of mum and dad – if your parents can help by providing you with funds that allow you to pay a deposit of 20% or more, you might be able to avoid the policy. Parental guarantees in particular have proven to be popular in recent years. However, note that some financial institutions may still require you to take LMI because they don’t view third party donations as part of a borrower’s deposit savings.
Ask a family member to be a guarantor – a guarantor is someone who agrees to guarantee part or all of your loan if the unfortunate happens and you cannot pay your mortgage. The responsibility falls to them, and this additional security means there is less risk for the bank or the lending institution. However, it is not without risk for the guarantor because they are putting their own finances on the line.
Ask for an LMI waiver – some lenders will consider waiving the insurance for certain types of professions, such as engineers, doctors, dentists, lawyers, accountants, pharmacists and veterinarians. If you are in any of these occupations or similar (where job security and incomes are generally high) it is worth asking your lender if they offer LMI-free home loans.
Can I get a refund on my LMI?
Sometimes. Some lenders will offer refunds for early payments. However, some LMI providers will not offer refunds to any of its lenders. Details of refund eligibility will be in the insurance policy.
How do I apply for the insurance policy?
You don’t need to. Your lender will prepare and provide all the necessary paperwork and documentation for you. Your broker will read it thoroughly and go through everything with you, right down to the last word. To make sure you qualify for LMI, your lender will check that you are able to easily meet your monthly repayments and that the property you intend to buy meets its mortgage insurance underwriting guidelines.
Where can I get more information?
If you are ready to apply for a mortgage home loan, get in touch with iMortgage Broker Brisbane for a free consultation. We will be happy to explain any part of the process to you, including the costs and other factors related to LMI premiums. You can learn more on the financial stability of LMI from the Reserve Bank of Australia.
We look forward to hearing from you.