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What is Lenders Mortgage Insurance?

Contrary to what many people believe/understand, Lenders Mortgage Insurance (LMI) is an insurance paid by the lender in case the borrower defaults. There is no protection to the security property if it is damaged or neglected – basically the lender is paid out the shortfall if the security property is sold and didn’t fully cover the loan/s payout.

Therefore LMI is not to be confused with Loan Protection insurance or Mortgage Protection Insurance which cover the borrower.

How much is Lenders Mortgage Insurance?

Lenders Mortgage Insurance is paid as a once-off and can often be capitalised into the loan. The premium is generally calculated as a percentage of the loan amount and also as a percentage of the loan value compared to the property value e.g. the higher the loan amount and the higher the percentage of borrowings, the higher the LMI premium.

Loans over $1 million are generally not mortgage insurable and if they are and at a higher lending ratio they would probably have 00000 within the quoted premium.

As a general rule you will only need to pay LMI if you are borrowing over 80% of the property value/s or 60% of the values if using a low doc loan facility. Therefore the advantage to the borrower is that the banks will let you borrow more by paying this premium.

How to avoid Lenders Mortgage Insurance?

In some cases there are options to avoid paying mortgage insurance altogether, in other instances there are ways to minimise the amount of mortgage insurance premium.

Before taking a quote from a bank including a mortgage insurance quote, always speak to a reputable mortgage broker to see if they have alternative ideas on how to achieve the same solution at a reduced cost. Our valuable cash is always better in our hands than a bank or financial institution. Another disadvantage of going through a mortgage insurer is that the loan application will be scrutinised much tougher than how a bank would assess the application and often much more information is required to be produced for income and deposit verification.

The turnaround time for an approval is also slowed down if a deal has to go through this process as now not just one sign off is required on the loan but a sign off by a totally new institution being the mortgage insurer.

These are options to avoid LMI:

• For those who are within the medical profession including doctors, dentists, vets and several others within this realm, 90% without paying any mortgage insurance is often achievable. For the rest of us there are lenders out there who will lend up to 85% without paying mortgage insurance but to achieve this you need the advice of somebody who knows the market well to find these products.

• Another way of avoiding mortgage insurance is if you are lucky enough to have family members in a position to offer additional security or cash by way of a guarantor then mortgage insurance can be avoided altogether and often borrowers can borrow up to 100% of the purchase price (no deposit home loans). The guarantor in many cases will only be required only for the amount required to get the lending ratio down to a level whereby LMI would not be required e.g. If a doctor wanted to borrow 100% for a new property and had no deposit, the guarantor would only be required for 10%. Not only do borrowers need to do their own due diligence here to make sure they are comfortable with the arrangement and also obviously the guarantors but mortgage brokers need to ask questions such as why is there no deposit and how going forward will the borrower be able to make principal payments into the loan. If you have the luxury of this option then it can save you much money and hassle so always ask the question.

How to reduce premiums on Lenders Mortgage Insurance?

If you aren’t a doctor, not able to have the luxury of a guarantor and can’t find a lender who will lend to you over 80% without having to pay lenders mortgage insurance then here are some tips on how to reduce the premium/s.

• Once loans go over $300K then the premium can become much more expensive. If you required a home loan for say $290K and an investment loan for $295k, rather than combining the loans and going through the one mortgage insurer, you will usually be better off keeping the loans separate of one another to be on the lower of an increasing scale premium.

• Also find out the premiums quoted by the mortgage insurers for each borrowing ratio. E.g. Reducing the loan slightly from a 90% ratio to an 89% ratio can drop the premium more than you would expect.

• Also remember there are different mortgage insurers, so compare who the different banks are using and what they are quoting.

• Some lenders if you fit certain criteria also offer their own in-house mortgage insurance at a substantially discounted rate, definitely also worth looking into.

I hope this has given you some more insight into untangling the complicated web of Lenders Mortgage Insurance and some tools to get the best bang for your buck. Importantly make sure you have done your research and seek the advice of a good mortgage broker and professionals to help you make the best decision for you. The final advice from Mortgage Broker Brisbane is don’t just take the first quote or summary given to you, there may be another option round the corner that could save you thousands of $$$.

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