By Stuart Pullar - Principal, Mortgage Choice Ashgrove, January 2014.
1: LMI protects the lender; not you:
Lenders Mortgage Insurance, or LMI, is essentially an insurance premium that protects the lender in the event of default.
This is distinct from Risk Insurance (such as Life Insurance, Trauma, and Income Protection Insurance) that do protect you and that you should also consider.
This insurance only applies if you wish to borrow above 80% of the value of the properties.
If you default on your loan, the lender has the right to repossess the property. In the event of a shortfall, the Mortgage Insurer will pay the lender for the loss and then chase you for it.
2: Premiums start low and go high:
The premiums are based on the Loan to Value Ratio (LVR) and the size of the loan. Each lender if different but as a guide, LMI tends to jump at 85% and 90% LVR. For example,
- The insurance on an owner occupied property valued at $500,000 at 85% is in the order of $3,500 to $4,000; at 90% it is roughly double at $8,000 to $8,500; at 95% it is roughly double again at $16,000 to $17,000.
- The insurance on an owner occupied property valued at $800,000 at 85% is in the order of $8,500 to $9,000; at 90% it is roughly double at $16,000 to $17,000; at 95% it is roughly double again at $35,000 to $36,000.
3: LMI is not refundable:
It is often an important consideration how much of your funds to use to complete on the purchase and how much to keep back for other purposes, or as a rainy day fund.
If you are completing at over 80% LVR than extra funds will reduce your premium. If you hold the funds back, they will be available after settlement but even if you put them into the loan straight after, you will avoid paying interest on these funds, but you will not receive a refund on the LMI.
A good broker will show you the premiums at each percentile of your LVR and help you decide on the right balance.
4: Gifts and guarantors can reduce or eliminate LMI
This is where generous parents can often greatly assist in reducing the costs of the transaction and in some cases make it possible to proceed at all.
- Gifts can help get the LVR closer to that 80% LVR mark where no LMI is payable. Even a partial reduction of LVR will reduce costs and may also make the transaction possible if lender policy or borrowing capacity require a lower loan amount.
- Guarantors are often a game changer. As long as the primary applicants have sufficient borrowing capacity, guarantor deals can be structured to avoid LMI entirely and allow the applicants to borrow up to 100% of the value of the primary property, in some cases borrowing costs as well.
A good broker will assess the suitability of the structure to avoid hardship for the guarantors and to help the applicants release the guarantee as soon as possible.
5: Each lender charges different LMI premiums:
Even though there are two Mortgage Insurers in the country, each lender has a different regime of premiums depending on the Insurers assessment of their risk profile.
This means that the same deal can cost more or less to ensure with different lenders. This can be an important consideration, alongside interest rates and other costs when selecting your home loan.
Further, some lenders internally insure some loans for certain target clients (i.e. lower risk) and offer lower premiums.
It is important to structure your lending correctly Because LMI is based on LVR (Loan to value ratio) and loan size, it is important to structure your lending correctly, particularly if you have more than one security.
6: Try not to Cross- Secure your properties:
Many lenders and brokers will recommend that you cross-secure your properties – often because it is simpler to arrange and because it makes you ‘stickier’ (an industry term that means it is harder for you to refinance).
This structure can have significant implications on the total LMI you would pay and is an area where a good broker can save you significant amount costs.
- For example, if you own two properties worth $500,000 and want to borrow 90% of the total value, or $900,000, the total LMI premium would be in the order of $23,400. Keeping the properties as standalone securities reduces the total premiums to $17,300 ($9150 for the investment property and $8140 or the owner occupied property).
If you have any questions on Lenders Mortgage Insurance or any other lending question please give me a call of 07 3366 9982.
(Image courtesy of www.genworth.com.au as at 21/01/2014)