Whether you’re trying to refinance, applying for a loan increase, or purchasing a property, an important consideration is whether you need to pay lenders mortgage insurance (LMI). Most mortgage lenders insure their loans above 80% LVR (loan-to-value ratio) if it is a full documentation loan, and over 60% LVR if it is a low documentation loan.
LMI is for the lenders’ protection, and safeguards them should the client default on the loan. It is a one-off premium which can be capitalised (added) to the loan. Additionally, the more someone borrows, the higher the interest repayments will be, which in turn will eat into cash flow.
Lenders mortgage insurance forms part of the cost base of the property, which means the property will need to increase in value to compensate for the cost of LMI if it is capitalised into the loan.
LMI providers won’t allow more than 1 million above 80% LVR, and at 95%, the loan would be limited to around 650k. However, the applicant’s exposure can be up to 2.5 million across several applications, and with several properties with more than one insurer, the aggregate amount of debt can be even higher, spreading one exposure across the insurers.
“LMI may only be added to the loan above 95% LVR if it is an owner occupied purchase, sometimes up to 99% (this allows pretty much the full amount of LMI to be capitalized onto the loan) so a purchaser does not have to come up with this money from their own cash or equity,” said Andrew Crossley, founder of Australian Property Advisory Group. “95% LVR inclusive of the LMI is the maximum for investment property purchases, meaning the loan will only end up being around 92% LVR. Refinancing is normally to a maximum of 90% LVR plus LMI.”
If purchasers wish to avoid having to pay LMI, they would have to use more of their cash or equity. “Bear in mind, borrowing more for investment properties can provide more tax-deductible interest, it uses less of the investor’s own money by the higher gearing/leverage, and it could assist the purchaser to purchase more properties,” Crossley said.
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