26/09/2008
Q: I bought an investment property last year for $360,000 with a 10% deposit, and I paid around $5,500 lenders mortgage insurance. I've since heard that you can get a partial refund on LMI from your lender, if you pay down the mortgage within the first few years - is this true? I recently inherited $25,000 and I'm considering using this to pay down the loan
A: It is possible in some circumstances to obtain a refund of the Lenders Mortgage Insurance (LMI) premium.
In our experience, this is possible when the loan is completely paid out within the first year of the loan. It is the mortgage insurer, rather than the lender, who calculates and pays the refund. The refund will vary on a case-by-case basis, but typically it will be about 50% of the mortgage insurance premium.
So if you pay you loan out within the first year, you should ask your lender to arrange a refund from the mortgage insurer. It would be wise to put the refund into your new loan, which will result in substantial interest savings over time
Even if you can't obtain a mortgage insurance refund, using the $25,000 to pay down the loan will save you money. Most loans calculate interest daily based on the balance of the loan. So, the $25,000 payment will save you interest.
Based on an interest rate of 9.0%, the monthly saving would be around $187, and the compound savings over the term of the loan would be many thousands of dollars. You should treat your home loan as a safe place to deposit funds and "earn" the interest rate you are currently paying for your loan. But remember, you will need to check with your lender that you can redraw funds out of your loan if you need them and if there is a redraw fee.
