Lender’s Mortgage Insurance (LMI) is an insurance policy that protects the lender from financial loss in the event that the borrower can’t afford to keep up their home loan repayments. The financial institution may make it a condition of borrowing that you pay for a lender’s mortgage insurance policy.
Under the terms that are included in most LMI policies, a financial institution can make a claim if the borrower defaults on the loan, and the sale of the property doesn’t equal the value of the mortgage. It might seem that there is benefit to the borrower from LMI, but by reducing the risk to the lender, LMI allows them to lend larger amounts and approve more home loan applications.
Lenders mortgage insurance is applied directly to your home loan when it applies, so it’s not technically an upfront fee – but you still pay for it. How do you know LMI applies to you?
What affects the cost of lender’s mortgage insurance?
There are a few things that affect the cost of LMI. These include:
- The size of loan you want
The greater the amount of money you are borrowing, the greater the potential loss of the financial institution in the event that you default. Hence the bigger your loan, the higher the cost of insuring against it.
- The amount of deposit you have
Canstar research has found the deposit you can raise will impact the interest rate offered to you by the bank, but it will also affect how much LMI you have to pay, if any.
A number of home loan products and providers will lend up to 95% of the property value, whereas standard home loans typically require a deposit of 20%, and low doc home loans may require a deposit between 20% and 40% of the property’s value. There are even a very small number of no deposit home loan products out there.
The smaller the deposit you have though, the higher the cost of LMI. For more information on how your deposit affects interest rates and LMI costs for first home buyers, read this article.
- Whether the property is for investment or to live in
Not all financial institutions will differentiate between an investment and residential property purchase when it comes to LMI, but some will.
- Full-time or casual?
Your employment status can also affect the perceived risk of lending to you, so this is another factor that might affect your LMI premium.
- The insurer used by the financial institution
There are several providers of lenders mortgage insurance and, just like any other insurance product, premiums can differ between institutions.
BEWARE OF THE HIDDEN TRAP – Case Study:
Helen and Joe Tollan
Helen and Joe Tollan discovered they owed $87,000 to QBE LMI when they defaulted on a loan 5 years ago.
“We just thought if they took your property … your money is already paid,” Ms Tollan told the 7.30 Report.
They managed to avoid bankruptcy, but have reached an agreement to pay back QBE LMI $450/week for the next 5 years.
Source: ABC News
How much does Lender’s Mortgage Insurance cost?
There are plenty of things that affect the cost of lender’s mortgage insurance, which we’ve discussed above. Call us today! Here at Ceebeks Business Solutions for GOOD we are always happy to help you choose, not only lender’s mortgage insurance, but a whole range of insurance products tailored to your needs.
General advice disclaimer
The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
Only financial planning advice provided by Ceebeks Financial Solutions is associated with MyPlanner Professional Services.
Chris Beks is a director of Ceebeks Financial Solutions and an Authorised Representative of MyPlanner Professional Services Pty Ltd, ABN 51 159 969 830; AFSL 425542 and is authorised to provide personal financial advice.