If you're in the market for a new home, you may have come across the term 'Lenders Mortgage Insurance'. It's important to understand what it is and the financial implications of Lenders Mortgage Insurance before taking out a home loan as it can add unexpected costs to your purchase. It can also have some benefits for those finding it difficult to save for a deposit.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is a payment that helps to protect your lender if you are unable to make repayments on your home loan. Lenders prefer borrowers to have a loan to value ratio of at least 80% (that is, they want you to have saved a minimum 20% deposit in order to qualify for a home loan). LMI protects the lender if the borrower can't make the payments on their loan, as the lender is more likely to be able to recoup the value of the loan when the deposit is added to the value of the property when sold.
Remember, LMI protects the banks, not the borrower
The ABC 7.30 broadcast a report on 15 September 2016 showcasing the impacts of LMI on borrowers who have defaulted on their home loan. The report highlights that in the case the property has dropped in value below the outstanding home loan, the lender/bank is covered by the insurer by the LMI, however if there is a shortfall between what the sale price and the loan, the insurance company can chase the borrower for the difference. Peter White, President of Finance Brokers Association of Australia (FBAA) highlighted the ambiguity and confusion around Lenders Mortgage Insurance. Peter said that the risks are disclosed but the detail is hidden in the terms and conditions and called for a “regulated document that every banker and every broker must give to the client”. When banks liquidate the asset as ‘Mortgagee in possession’ or a ‘fire sale’ they will sell as quickly as possible, even if it it’s lower than the loan or market value. This is where things get tricky for the borrower.
Mint Equity agrees that there is a lot of confusion around many elements of finance and home loans. Director, Zac Peteh said they won’t wait for the mortgage industry associations to provide these and his team are currently working on a series of FAQ and guides that will provide easy to understand information on key areas of mortgages and associated products.
How much will LMI cost?
The price (or premium) of the insurance will vary depending on the circumstances of the borrower as well as the loan amount, property location and value. Your mortgage broker will be able to provide you with an estimated LMI premium. Mint Equity can assess your LMI requirements and identify areas to help you save on costs.
There are two ways to pay your LMI:
- You can pay for the fee up front in one lump sum
- Spread the payments out over the duration of the home loan by adding the cost to your loan (available from some lenders).
What are the benefits of LMI?
For some people, saving a 20% deposit can seem like an impossible feat - especially when they are paying rent while trying to save. Borrowers also need to factor in stamp duty, conveyancing and other fees on top of the cost of the property. Lenders Mortgage Insurance allows people to get onto the property ladder sooner. With LMI, some lenders will allow you to borrow up to 95% of the home's value. LMI is not only available to people purchasing their own homes, but for those looking to buy an investment property too.
How can I avoid paying LMI?
If you're keen to avoid paying extra fees such as LMI, you will need to have your 20% deposit saved, or ask someone to be a guarantor for your home loan.
When someone agrees to a guarantor loan, a third party (usually a family member), becomes liable for an agreed amount of the loan should the borrower not be able to make repayments. The lender will then use the guarantor's property as collateral.
With many property industry experts predicting a 'cooling' of the property market in 2016, this could be a good time to start planning for your purchase. Whether you're looking for a loan for a personal or investment property, Mint Equity can help you to navigate the complex world of home loans.