Mortgage insurance is one of the most misunderstood parts of the Australian mortgage landscape. To make matters worse information ie: detail is hard to obtain and often even harder to understand. Most people try to avoid LMI while many consider it a terrible impost however the reality is that LMI allows first home buyers with limited deposit to purchase a home and it allows investors with aggressive equity strategies to more quickly develop their property portfolio. So LMI is an important part of the home loan puzzle.
The following are some critical points;
- LMI insures the lender – it offers you no protection
- LMI is not transferable – so if you refinance and your LVR is still above 80% you must pay LMI all over again.
- LMI is calculated as a percentage of the loan amount;
- the percentage increases as the loan amount increases – usually in stages;
- the percentage also increases as the LVR (loan valuation ratio) increases;
- as a result with last minute variables such as legal costs etc it is very difficult to calculate the exact amount in advance – see below.
Some lenders (very few) may offer LMI waivers up to 90% – this means that the lender is probably subsidising the premium for ‘prime borrowers’ such as doctors – this is no where near as common as it used to be. Other lenders such ING offer an alternative to LMI that is again targeted at sound borrowers eg: very stable employment and perfect savings history. This alternative can save thousands of dollars if you qualify.
Otherwise for the majority of lenders the risk that the lender will lose money rises as the loan to valuation ratio rises (LVR). To put is simply the less of your (the borrower) money at risk the greater the chance you will default. The result is that for home loans over 80% of the value of the security property an LMI premium is usually payable. This is a once off payment (because most of the risk that you will default is in the first few years of the home loan term.
Apart from the additional expense, if you need lenders mortgage insurance it can make the approval process more difficult and protracted. For instance you might receive ‘in principal’ approval from the lender but it will be subject to further checks and testing to receive the mortgage insurer’s approval. And because they insure people with less equity, mortgage insurers are more careful in their assessment of your home loan, after all they are takingthe risk rather than the lender. Thus where a bank might accept someone who had switched from one job to another three months ago, the mortgage insurer might not be prepared to.
Mortgage insurance costs cannot be given precisely as they differ between insurers and between home loans, but this table sets out a schedule of insurance fees from one of the major insurers – remember that the full insurance premium you’ll pay will include a 10% GST and stamp duty on top of that which is around the same amount.
Note in the table that there are premiums for mortgage insurance below loan to valuation ratios of 80%, but in most cases lenders either do not purchase the insurance, or they purchase it and don’t pass the costs onto their clients.
Note that insurers are often only prepared to go above 90% loan to valuation ratios for owner-occupiers, presumably on the assumption that an owner occupier is less likely to ‘walk away’ from his property if he gets into financial trouble and/or its value falls.
Note: This discussion and the calculations above are general and indicative. You should ensure that any specific figures on which you choose to rely have been checked with regard to your specific circumstances. This cannot be done definitively except by proceeding with a full home loan application.