03/07/2014
There is often quite a lot of confusion surrounding Lenders Mortgage Insurance (LMI). Lenders mortgage insurance or LMI as it’s commonly referred to, is one of the biggest misconceptions in property investing. However it could be one of the most important tools to grow and accelerate your property portfolio. In this four part series, I’ve delved into the issue for you.
What is it?
Lenders Mortgage Insurance (LMI) is insurance that protects the lender, not the borrower. In cases of mortgagee auctions, the insurer will pay the lender the shortfall between the sale price and the loan amount owed by the borrower. In the event that the insurer does pay out the policy, they will seek compensation from the borrower and try to recoup the loss, so it’s very important to understand that this doesn’t protect the borrower at all.
Currently there are only two mortgage insurance companies in Australia; they are Genworth and QBE. While they are similar it is important to note that all lenders have slightly different arrangements with the insurers. Some choose to work exclusively with one insurer only, while some are able to use both. For the lenders that do have access to both, a borrower is sometimes able to choose which insurer they would prefer, however most borrowers aren’t aware that this is an option, nor would they be aware of the benefits. This is something that should not be taken lightly, and is best discussed with your broker.
When does it apply?
Prior to 1965 lenders would only approve loans for up to 80% of the property value, or even less. This made it very difficult for buyers to get into the property market. Banks were reluctant to lend more than 80% of the property value because they were at risk of losing money if the home loan was not repaid. Even today, banks will lend first based on risk and place profit as a secondary priority.
However, LMI allows banks to now lend more than 80% because the insurer is taking over the risk of loss. This means purchasers with a smaller deposit can buy a home or investment property without the need for a 20% deposit.
As a general rule you will need to pay LMI if you are borrowing over 80% of the property value. However if you are self-employed and are applying for a low doc loan (i.e. you cannot prove your income) then LMI will apply if you borrow over 60% of the property value.
What does LMI look like?
The premium is a once off fee, disbursed at the time of settlement. Some lenders will allow you to add this to your loan (sometime referred as capitalising LMI to your loan) and others require it to be paid upfront. It isn’t refunded if you refinance or pay the loan out early; and it’s not transferable if you were to go to another lender.
The fee is calculated in a variety of ways, the general rule being ‘the higher the risk the higher the premium’. The main contributing factors are:
· Loan size
· LVR (loan value ratio)
· Type of borrower (first home buyer, standard, low doc)
The premiums are also different between each of the insurers and the lenders, as mentioned before each lender has negotiated different rates with the insurers.
As you can see, lenders mortgage insurance can get be a bit confusing to navigate. Be sure to stay tuned for Part Two where we discuss how LMI can affect your loan.
Michelle Coleman is a first-rate mortgage strategist and mum, and she heads up the team at W Financial. She is without a doubt, a legend of the Australian mortgage broking industry, having achieved over $500M of settlements in her 12+ year career to date, and won numerous industry awards, including #3 MPA Top Broker. Michelle is also a highly experienced property investor. www.wfinancial.com.au
To see the rest of this series and to read more Expert Advice articles by Michelle, click here
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
