Lenders Mortgage Insurance?
Mortgage insurance sounds like such a great idea – until you learn it’s there to protect the lender and not you. All of a sudden it becomes another huge, unnecessary fee you have to pay out for no return.
Or is it?
It’s not all bad news. Lender’s mortgage insurance is your bank’s way of allowing people with little or no deposit to enter the housing market sooner, instead of making you save and save for that seemingly-impossible 20% deposit.
What is Lender’s Mortgage Insurance?
Sometimes called “LMI”, banks and lenders use lender’s mortgage insurance when the amount of equity in your home (or the amount of deposit you have) is lower than their required safety margins.
When you have only a small amount of equity a mortgage lender might consider lending you money to be a bigger risk than lending to someone with a bigger deposit.
Rather than say no and decline your application, instead they simply take out mortgage insurance protection to protect themselves against any potential losses they may incur.
This means you can borrow more money than you normally would have, which could get you into your own home sooner.
When Is Mortgage Insurance Charged?
In most cases, banks will charge a mortgage insurance premium on any loan that is more than 80% of the purchase price or valuation of your home. The exception to this rule is with low-doc loans, where banks may charge mortgage insurance for any loan exceeding 60% of the home’s value or purchase price.
Who Gets Charged Mortgage Protection Insurance?
Usually first home buyers or some newly-divorced people only have a small deposit to put towards purchasing a home. If the banks insisted you save up the entire 20% deposit, you could be waiting a long time to buy your home. House prices would likely have gone up, which means your deposit may no longer be enough.
Instead, the option of paying an insurance premium to cover the bank’s risk means you can enter the real estate market now instead of waiting years.
How Much is a Mortgage Insurance Protection Premium?
The premiums charged differ widely depending on the loan amount you applied for, the loan-to-value ratio (LVR) and the location of your property. The greater the perceived risk to the lender, the higher the premium may be.
How Often Must You Pay Lender’s Mortgage Insurance?
This premium is a one-off charge, applied when you purchase your home or refinance at a high loan-to-value ratio. Most mortgage brokers may allow you to capitalise the cost onto the loan amount.
Can I Avoid Paying Mortgage Insurance?
Yes you can. You’ll need to have a deposit or equity that’s 20% or more of your home’s purchase price, plus you’ll still need to pay any government fees and stamp duty that may be charged as well.
Mortgage Insurance may initially seem like an unnecessary cost, but in reality it could be the tool that helps you get into your home sooner rather than later.