What is an SMSF?

A Self Managed Super Fund is a trust you use in order to manage your own superannuation. Basically instead of the employer provided super fund, you have direct control over your assets. This enables you to choose where you invest your money for your retirement. You can put the money in a number of different places including capital investments such as shares and property. Each different investment comes with a variety of risks.

What laws and restrictions will affect investing in property?

Whilst is is possible to use your fund to invest in property, there are certain laws and restrictions that can affect your eligibility and limit the options you have available. Some examples of the legal conditions under which an SMSF can borrow money include;

• The asset is an asset that the SMSF (you) could legally otherwise acquire if it had available funds
• A security trust (security custodian) holds the asset until all repayments are made.
• Once all repayments have been made the SMSF must have the right to acquire legal title of the asset from the Security Trustee

How much you can borrow with these loans differs from normal mortgage applications. Standard investment loans are offered at up to 80% of the property value however lenders usually restrict the amount to 72% or 75%.

It is also important to note that loc doc loans are not available and the fund must be able to prove it can repay the loan.

Which banks and lenders can help and what interest rates are available?

Many banks are not willing to lend to SMSFs. They believe that the loans are more complex and lead to less profit. However there are a number of lenders that do not see it this way and are willing to assess an application. These can be difficult to find however without professional help from a mortgage broker.

Interest rates for SMSF loans are higher than for normal property purchases. Depending upon your circumstances and the risks the lenders perceive, low interest rates may be available. However as there are large differences in pricing between the major lenders this depends largely upon which bank you apply to.

What are the risks associated with investing in property this way?

Property is what is called a capital growth investment and can be useful for capital gains and tax benefits using negative gearing and depreciation allowances. However as the global financial crisis showed, value can fall from time to time possibly leading to large capital losses.

As for cash flow, the property may be vacant or tenants may not pay rent and you may default on your repayments. If the situation arises where you need money it is also difficult to sell quickly at a high price.

How Should I Apply?

Applying for a loan on your own can be difficult. There are not too many lenders willing to lend to SMSFs and each declined application will affect your eligibility next time around as it will go on your file. Even if you find a lender yourself, such as your current bank, you are unlikely to be offered the lowest interest rate.

Applying through a mortgage broker that works with many different lenders and specialises in different loan types such as SMSF loans, is the safest option. As they know the lending criteria of the banks they are aware of who offers these loans, where you may be eligible to apply and who may have the lowest interest rates.

What is NRAS?

In 2008, the Australian Federal government along with commitments from states and territories initiated the National Rental Affordability Scheme (NRAS). NRAS legislation represents a long-term plan aimed to provide new rental housing to low and moderate-income earners at affordable costs.

Under the NRAS, potential investors are urged to buy a NRAS approved dwelling and agree to rent the property out at 20% below the local market home rental rate.

As an incentive to encourage large-scale investment in NRAS approved properties, the government offers either a grant or a tax exemption for up to 10 years. Based on present criteria, the Australian Government has identified more than 1.5 million national households as potential tenants eligible for NRAS assistance.

What are the Incentives?

The National Rental Affordability Scheme is a national opportunity for a property investment that provides financial incentives that combine both a potential real gain and a tax rebate. Investing in an NRAS approved property can currently provide up to almost $10,000 in state and national tax tree incentives.

The NRAS agreement is secured for 10 years, but the property must remain approved for the benefits to continue. When the agreement ends, the investor is free to on-sell the property or rent it out at market value. Prior termination will incur a penalty unless the buyer agrees to continue the obligations under the NRAS agreement.

Investing in a NRAS Property

NRAS is aimed at large scale not individual investment. Obtaining NRAS approval of properties and maintenance of that approval is complicated legal process. Consequently, investors usually purchase an NRAS approved dwelling from a NRAS approved consortium.

Consortiums consist of two or more investors that purchase or construct a home development that will meet the NRAS requirements. Consortiums can take different legal forms. Non-Entity Joint Venture, Head Lease Structured and Real-Estate Delivery Agreement Consortiums are most common.

Typically, the consortium provides the funds to finance a housing development and obtains NRAS approval. The individual investor then purchases one or more of these properties as their investment and gains the benefit of the NRAS incentives and any future potential property sale. Usually the consortium maintains the property. The individual is responsible for claiming their NRAS tax rebate in their tax return.

How to Finance a NRAS Investment Purchase

Finding a loan to finance a purchase through consortium can present difficulties. Experienced national mortgage brokers that specialise in NRAS approved properties can assist the investor in obtaining financing based on their income, employment, property type and property location.

Getting approval for a loan largely depends on how banks and lenders view NRAS properties and the particular consortium through which an investor chooses to invest. Banks and other lenders investigate the legal structure and contractual policies of consortiums with their investors and determine how the policies impact the security position of the property. After evaluation some lenders may label certain NRAS consortiums as high-risk investments.

Although some banks and lenders approve many consortiums with a “headlease” structure, many lenders favour consortiums that are structured as non-entity joint ventures. Every investor should consult with their financial advisers and mortgage brokers to determine the right product for them.

A mortgage broker can help you finance your loan

A mortgage broker experienced in obtaining loans for NRAS properties will know the NRAS consortiums and their potential lenders. Additionally, the broker can help frame an investor’s application in the most favourable light for their situation and the lending guidelines of the banks.

The broker can work with banks to obtain a mortgage with a Loan to Value Ratio (LVR) of up to 90% plus Lenders Mortgage Insurance (LMI). In some cases, lenders can be found that will consider a portion of the tax incentive in assessing the investor’s ability to repay the loan.

Saving a deposit for a new home can be quite stressful, especially if you are trying to save ten or twenty percent of the value of the property. These 5 essential tips should help bring you closer to owning your own home.

With a guarantor you may even qualify for a no deposit home loan! Read on to find out more.

Have as little debt as possible! Before applying for your loan, pay off your debts, or at least have some money left over after each monthly payment which you then can save each and every month.

Banks and lenders do not like their customers paying out large sums of money on other debts. They also make saving your deposit far more difficult to do.

Consolidating all your debts into one monthly payment is a great first step and it may also help you move away from those high interest repayments such as credit card debts. Next, prioritise your repayments over and above your other expenses, other than essentials such as water and electricity. You will pay them off faster and at the same time prove to lenders that you can manage your debt well.

Make a budget for all your expenses. Monthly expenses such as rent, food and utilities bills are a large drain on your finances. Make a budget and calculate exactly how much you must spend each month. Include any current debts such as credit card repayments as mentioned above. Once you have done this it will be far easier to keep track of your spending habits and keeping your living costs down.

Transfer your earnings automatically each month. Once you have taken the above steps you should find you have more money left over at the end of each month. A great way to save a set amount of money each month to have it transfer to a savings account just after you receive your pay.

This should be easy to work out after you have created your monthly budget. Many banks and lenders offer easy to use solutions here. It is also useful to have your savings account NOT connected to a debit or credit card. This way you cannot withdraw the money on a whim.

Remember to factor in Lenders Mortgage Insurance (LMI). Lmi guarantees the lender if you fall into difficulty and cannot service the loan. LMI is a cost not included in the deposit. Therefore for a mortgage where you borrow at least 80% of the property value, you need a 20% deposit and you may need to pay Lenders mortgage insurance. This can come to a few thousand dollars.

As an example; on a $100 000 loan you may pay $1000 insurance. A lender will normally loan you $99 000 for the mortgage and keep the rest . Keep this in mind when considering your deposit. When using a guarantor as security for your loan a lender may waive the requirement for LMI.

If your parents can act as guarantor you are eligible to apply for a no deposit home loan! Your parents can use the value of their property as a guarantee for your loan. Some lenders are willing to waive the requirement for savings due to the extra security their home provides. With a successful application, this will enable you to borrow 100% of the value of the property and possibly even more.

There are other ways you may be eligible for a no deposit home loan. Follow the link to read up on what they are and how you may apply.

What is a Warehouse Conversion?

Old warehouses can often lie unused by businesses and developers often come in, purchase them and then convert them into large, open plan apartments. Once developed they are sold on to the public, often for large sums of money.

They are also known as commercial property conversions or industrial conversions and lenders see them as the same types of buildings when considering a loan application. Therefore in general the same lending policies apply.

Banks can be conservative

There are a number of reasons banks have stricter lending criteria for converted warehouses. These can include but are not limited to;

• Banks see higher risk due to inflated sales price from overzealous marketing.
• Apartments sometimes have unusual and unique designs with limited appeal
• Warehouses are often located in industrial, not residential areas.
• A conversion containing more than 30 units such as those near or within a CBD may be considered a high rise building. This limits the amount you can borrow from some lenders.

Banks, lenders and how much you can borrow

Not all lenders have these policies however and as long as you have a good income coupled with a strong financial position a good Mortgage Broker should be able to find one for you. A broker working with many different lenders is the best option as they would have a far greater chance of finding a lender willing to work with you.

Once a lender is found how much you can borrow depends upon what type of buyer you are and the type of loan you are after. For example an investor can borrow up to 95% of the property value (95%LVR), whilst those looking at a low doc loan can usually only borrow up to 80%.

First home buyers may be eligible for warehouse conversions loans up to 95% however restrictions apply. As is the case for many loan types basic loan discounts and competitive professional packages are available. No matter your situation some lenders also give up to 95% loans on a case by case basis.

What is a fixed rate home loan?

A fixed rate home loan will allow you to lock in an interest rate during the entire fixed term period. A locked interest rate is a fixed interest rate that many bank lenders offer to borrowers for a specified amount of time. You can choose from a 3, 5, 7, 10, 15 or 20 year fixed rate period.

This means that you will be able to know exactly how much your mortgage payments will be for the duration of the fixed rate term. For example, a 10 year fixed term loan will remain at the agreed upon interest rate for the entire 10 years, regardless of variable interest rate fluctuations.

What is a “rate lock”?

Fixed interest rates change very frequently and can change between the time you have applied and the time when your loan settles. A rate lock is the term used to describe when a lender holds a borrower’s current fixed rate quote for a short period of time. Borrowers may request a rate lock for up to 90 days.

If you apply for a fixed rate loan without getting a “rate lock”, there is a chance that you may end up with a rate higher interest than the fixed rate you initially applied to receive. Borrowers usually are required to pay a “rate lock” fee to insure that the interest rate which they applied for has been locked for them. Lenders typically charge a percentage of the loan amount that is borrowed which is usually around 0.15%. Check with your lender because every lender has different policies and rules.

What are the differences between the 3, 5, 7, 10, 15 and 20 year fixed rate loans?

3 Year Fixed Rate Loan
The most popular fixed rate loan is for 3 years. The interest rates are much lower than any other multiple year fixed rate loans, besides the 1 or 2 year loans which have even lower interest rates.

5 Year Fixed Rate Loans
Lenders offer 5 year fixed rate loans at higher interest rates than the 3 year fixed interest rates. The 5 year fixed rate loan is great for borrowers who cannot afford to pay the loan off in 3 years.

7, 10 and 15 Year Fixed Rate Loans
Some lenders may offer fixed rate loans for 7, 10 or 15 years. However, there will be a large break cost to pay off the loans early and break the contract. If you are thinking of getting this kind of loan, you need to be sure that you will be able to keep the property for the length of the fixed rate loan duration.

20 Year Fixed Rate Loans and 30 Year Fixed Rate Loans
The 20 year fixed rate loans and 30 year fixed rate loans are only available to Americans. They are not available in Australia or the UK. These lengthy fixed rate loans do not have any break fees because American borrowers usually have a higher profit margin on their loans.

What are the advantages of a fixed rate loan?

One of the main advantages of having a fixed rate loan is the security of knowing that your interest rate will be locked for the duration of your fixed rate term even if interest rates have increased during that time. This can save you a lot of money in the future.

Some bank lenders that offer fixed rate loans may allow you to make an unlimited number of extra repayments and redraw those extra repayments without incurring any penalties.

What are the disadvantages of a fixed rate loan?

Many lenders who offer a fixed rate mortgages have a limit on the number of extra payments that borrowers can make without the lender charging a penalty fee for the overpayment. Usually these types of loans have a higher upfront cost. They might also restrict the borrower from redrawing extra payments during the fixed loan term. Some lenders may also charge a “break fee” if the borrower terminates the fixed loan term earlier than planned. Break fees can end up costing thousands of dollars. Another disadvantage of a fixed rate loan is that you will not benefit from a lower repayment if interest rates decrease and they do not allow an offset.

What exactly is a break fee?

Lenders who offer fixed rate loans will usually borrow the funds from the money market themselves for around the same amount of time that they give the customer for the fixed rate loan. These lenders “buy” the loan money at wholesale rates and “sell” it to the borrowers at retail rates. The difference between the two loans is the margin of profit gained from the loan.

If a borrower pays off their loan contract early by making extra payments or by paying in full, then the lender will have to lend that money to another borrower or sell it back into the money market. The point of a fixed rate loan is so that the lender can control the repayment amount and number of payments that you have to repay. If you decide to pay off the fixed rate home loan early and the money market’s interest rates have decreased, the lender might lose money. To offset the estimated margin loss, the lender charges their customers break fees for paying off the loan early. However, if there is an increase on the interest rates then the lender may offer the borrower a deal to pay off the loan early. The lender will be able to use the money to lend to another borrower at a higher interest rate, resulting in a higher profit margin for the lender.

Break fees can end up being extremely high. It is highly recommended that you apply for a fixed rate loan for 5 years or less. For example, a $400,000 fixed rate loan for 5 years has a wholesale interest rate of 4.5%. If the borrower pays off the loan in 2 years when the money market’s interest rate is 3%, then the break cost can end up costing $18,000! To calculate this, you take the current loan amount, multiply it by the wholesale rate change, and multiply that by the term remaining on the loan. $400,000 x 1.5% x 3% = $18,000.

What does the term “95% home loan” mean?

When a home is purchased, some lenders will offer a mortgage for 95 percent of the price of the home. Refinance loans are not eligible for this type of loan.

At the closing table, the borrower must provide the other five percent to complete the purchase of the property. In addition to the cost of the property, the buyer must have enough money to cover all closing costs including legal fees and stamp duty.

Do all lenders offer 95% home loans?

Following recent events in the lending markets, banks have reduced the percentage of the home price offered through a mortgage loan. The maximum LVR for most lenders is 90 percent or less. Mortgage lenders are aware that selling the mortgaged security to another institution is not possible when the loan balance is close to 100 percent.

When a 95 home loan is offered, the lender can be left holding the property if the borrower is unable to sustain the payments on the loan. The mortgage insurers carry the risk of loss when a 95 home loan is underwritten. Since the insurers are less likely to insure these high-percentage loans, the banks are unwilling to offer or approve the 95 home loans.

Market competition is driving more lenders to offer 95% home loans!

Mortgage insurance pricing is becoming more affordable for institutions that offer 95 home loans. Since the risk can be mitigated by insuring the mortgage, large banks are more willing to offer a 95 home loan option to borrowers who meet the stringent qualifications.

What causes 95 home loans to vary in cost?

Perceived risk of default will drive up the cost of a 95 home loan. Lenders will require extensive proof of ability to pay from the borrower prior to offering the 95 home loan. If the mortgage insurer charges the bank more money to accept the risk, the price of the loan will increase through the interest rate that is offered. Mortgage insurance costs are passed on to the borrower.

Most lenders have very high requirements to prove that the applicant can afford the loan and will make payments on time. This information is then provided to the mortgage insurer as proof of lower risk.

Contact multiple lenders prior to agreeing to the terms of the loan since mortgage insurance will affect the cost of the loan. The cheapest loan may not offer the best terms in the long run.

Two approaches to lenders mortgage insurance

Lenders follow one of two methods for calculating the actual percentage of the loan offered. The first method includes the cost of mortgage insurance by adding the premium charged to the loan value. This approach will drive the percentage of the loan up to 97 or 98 percent. More risk is carried by the lending institution.

The second method is to require upfront payment of the insurance premium at the time of settlement. This approach ensures that the insurance is paid prior to the completion of the loan agreement.

Many lenders are adopting the second method as part of the proof that the borrower has sufficient funds to afford the loan. Since the loan applicant must qualify for the 95 home loan and then pay the insurance cost, the bank perceives less risk and will underwrite the loan.

Qualifying for a 95 home loan

Since the home loan covers a very high percentage of the home price, the borrower will be required to provide substantial proof of his ability to pay. The application will require detailed information concerning every aspect of the financial history. Even if the applicant can pass the lender’s approval process, the mortgage insurer will be given the opportunity to review the application. High-percentage loans will have more stringent insurance requirements since the perceived risk of default is higher. When the lender is also the mortgage insurer, the terms can be easier to meet.

These are some of the most important qualifications that 95 home loan applicants must meet:

1. Savings habits – Lenders rely on this factor more than any other when considering an applicant’s ability to afford the 95 mortgage. The savings account must contain the entire five percent of the home price and reveal a track record of saving money for at least the previous six months.

Active savings habits that continue during the home loan approval process are an indication to the bank that the borrower has the cash flow necessary to continue to make payments and maintain the property. Some banks will not approve the loan if deposits to the bank account have not been consistent.

If the borrower is not able to prove the existence of genuine savings, the lender will not proceed with the approval process. The perceived risk will be too great to approve the mortgage so the process will stop.

2. Flawless credit history – Lenders require the applicant to have a credit history that has zero adverse comments. There are not exceptions to this requirement when applying for a 95 home loan. Every outstanding debt must be in good standing for the past six months without any late payments.

3. Stable employment – Applicants must have full time employment for the previous 12 months with the same employer. Some exceptions can be made for someone with six months of employment with the same company and more than two years in the same industry. Lenders will accept some other variations.

4. Readily saleable property – The property to be purchased must fall within the standard guidelines set forth by the lending institution. Remote locations, high-rise condominiums, and very small properties will not be considered for high-percentage loans by most lenders. Prior approval of the property will save time and frustration by the applicant and the lender.

5. Age-appropriate asset ownership – Many banks are willing to approve 95 home loans for applicants with steadily growing asset portfolios. If the debt ratio is very high and credit has been used excessively, the 95 home loan is not likely to be approved.

Are there maximum loan amounts for a 95 home loan?

Theoretically, a borrower can find a lender willing to loan up to $1,000,000 at 95 percent of the property price. Since the mortgage insurers set the actual insurance amount for the mortgage security, most lenders have lowered the actual loan amounts to $650,000 in metro areas. For properties located in rural areas, the loan limits are lower because of the speciality properties that exist on the market. At the beginning of the application process, provide the postcode to the lender since the loan limits are tied to property location.

Home mortgage lenders evaluate the entire financial package of the borrower. People seeking to purchase a property worth $1,000,000 or more should be able to save more than five percent of the purchase price. Banks evaluate the ability to repay the loan through a complete financial evaluation and expensive properties will be scrutinized more closely to prevent default on the home loan.

Get a 95% mortgage today.

Most everyone is familiar with the process of applying for home loans as an individual or couple. However, many people don’t know that it is also possible for a trust to obtain a residential loan. Loans to trusts are a bit more complicated in nature, but if you have the right type of trust and can locate an appropriate lender, the loan you need can be secured. 

What is a Trust?

A trust is a legal agreement in which the assets of a person, group of people, or family are owned on their behalf by another person or company. The person or entity that owns and controls the assets is known as the trustee, and the person, group of people, or family allowing the trustee to control said assets are referred to as beneficiaries of the trust. The arrangement is controlled by a trust deed, which is a document stating various rules that must be followed by the trustee, as well as how the profits of the assets are to be distributed among beneficiaries. Most trusts are created to either maximize tax benefits or protect the assets in question. 

Why Are Trusts Created?

The majority of trusts are created to protect a given asset. Since the assets included in the trust are not the legal property of the beneficiaries of the trust, so the assets are therefore safe from the liabilities of the beneficiaries. For example, if the beneficiary of the trust files bankruptcy, the assets in the trust will not be included in the bankruptcy process. In the case where a loan is taken out by the trust, the lender will of course secure a guarantee of repayment. However, no other creditors will be able to touch the assets protected by the trust. 

A trust may also be developed in order to attain certain tax benefits. The government offers the beneficiaries of a trust a 50 percent exemption on capital gains tax. However, this tax benefit does not extend to a company’s shareholders, thus making a trust arrangement more profitable. Trusts can also be used to pass assets from parent to child without incurring taxes. Property can usually only be transferred to one’s children without incurring tax in the event of one’s death, but a trust allows this tax-free exchange to take place while the parent is still alive. Finally, a trust can be used to divide investment income between spouses under a lower tax rate. This process is known as income-splitting. Income-splitting was once also used to divide income among other family members as well, but this is no longer possible. 

Securing a Loan Through a Trust

If you are looking to secure a loan through your trust, you must be careful in choosing the type of trust you will arrange. Some types of trusts are not appealing to lenders. In addition, not many loan brokers are well-educated in the area of trust lending. As a result, many bank employees and residential lenders will not want to lend to a trust and will instead direct you to the commercial lending division. Borrowing from the commercial lending division means more fees and higher interest rates, so it is better to secure a residential mortgage loan if you can. 

The best type of trust to arrange if you hope to secure a loan is a family trust. This type of trust is typically created to protect a family’s assets and provide tax benefits to family members. A family trust is considered a discretionary trust, meaning that the trustee use his or her best judgement to distribute the income and assets included in the trust as long as the rules of the trust deed are not violated. Having this type of trust will offer you the most options for securing a loan through the trust.

It is also possible to borrow through a unit trust, though residential loans to unit trusts are only available from select lenders. A unit trust is a type of trust in which the assets included are divided into shares, or units. Individual beneficiaries will own different numbers of units that represent their entitlement to voting power, income, and capital gains. Units can be held by companies, individuals, or even by other trusts. In addition, a unit can be categorized based on what type of asset it represents. This type of trust is most common when beneficiaries are not all family members. 

Unit trusts do not provide the same degree of tax benefits as a discretionary trust, with the exception of cases in which units are owned by a discretionary trust. In addition, unit trusts aren’t as good at protecting assets either. If for some reason a beneficiary of a unit trust becomes bankrupt, his or her units will be included in the proceedings and will most likely be sold to pay off debt. 

A third type of trust to which loans can be extended is a self-managed super fund trust or SMSF. An SMSF trust is typically created for people that wish to be in charge of their own super fund. In this type of trust, the typical amount of money from a person’s employer will be added to the fund as well as anything he or she wishes to add. Typically, the person in question will act as trustee and retain direct control over the fund. 

Residential loans to a self-managed super fund trust are rare and difficult to secure, but they are possible to obtain. Most lenders require a loan-to-value ratio of no more than 70%, however a select few will allow up to 80% for a SMSF mortgage. Typically, such loans are extended so that the SMSF can invest in residential property. In order for this to work, the property in question must usually be purchased by a limited liability company and held in a trust for the SMSF trust. Once the loan on the property is repaid, the SMSF will have the right to acquire the property. 

The final type of trust we will discuss is the hybrid trust, which combines the features of both a unit trust and discretionary trust. However, it is nearly impossible to secure a loan through this type of arrangement. There are very few lenders that will consider extending a residential loan to a hybrid trust.

Trusts can be very beneficial in many ways. They are used to attain tax benefits as well as to protect important assets from the liabilities of the beneficiaries. In addition, it is sometimes possible to secure a loan through a trust. However, it is important to be careful of the type of trust you create if you intend to use it to obtain a loan. There are several types of trusts that can receive loans including family trusts, unit trusts, and self-managed super fund trusts. The best type of trust for securing a low interest residential loan is the family trust as it is the one with which lenders are typically most comfortable. Finally, it is sometimes possible to obtain a loan through a hybrid trust, though this is a rare occurrence.

Learn more about loans to trusts.

A lender is at risk for financial loss when they agree to grant a home loan to a borrower. If the borrower should default on the loan, the lender will lose the amount left on the mortgage at the time of the borrower’s final payment. In order to prevent losses on mortgages and maintain a payable business venture, the lender will often take out mortgage insurance, especially if a large amount of the home’s purchase price is financed. 

A lender’s mortgage insurance policy will compensate the lender for losses incurred in the event that the borrower cannot repay the loan. The coverage offered by the insurer is typically between 20% and 50%, but it sometimes may be higher. The premium for mortgage insurance could be paid by the lender, but it is usually paid by the borrower in situations with less than 20% equity on the home in question. 

The cost of the mortgage insurance is determined by three different risk-related variables. The first variable considered is the amount of the loan. Higher loan amounts are associated with increased risk for the lender, and thus for the insurer. The second variable considered in the calculation of lender’s mortgage insurance premiums is the loan to value ratio. The loan to value ratio is the amount of the loan expressed as a percentage of the property value. Higher loan to value ratios indicate higher risk of loss for the lender and insurer. The final variable considered in the determination of the mortgage insurance premium is the type of loan involved. Loans with less documentation are considered to be more risky to the insurer than loans with full documentation. The premium will be charged as a percentage of the amount borrowed. The higher the risk of default (as perceived by the insurer), the higher the mortgage insurance premium will be. 

Mortgage insurance will typically be imposed on borrowers of full documentation loans that have a loan to value ratio of 80% or more. In the case of lo doc loans, mortgage insurance may apply for loans with a loan to value ratio of 60% or more. Many lenders choose to insure all of their loans without consideration for the loan to value ratio, but if the ratio is less than the aforementioned percentages, the lender will typically pay the premiums themselves. 

Not all lenders have the same mortgage insurance premiums. In fact, the cost of mortgage insurance can differ by as much as $10,000 between banks. When choosing the best loan for any scenario, how much you will pay for mortgage insurance should be a serious consideration. The price of mortgage insurance imposed on a borrower can differ for several different reasons including the way the lender calculates the premium, the loan amount, and the lender’s chosen insurer. 

Most lenders determine the cost of their mortgage insurance premiums by adding the premium to the loan instead of asking the borrower to pay the premium out of pocket at the loan’s settlement. This method of “capitalising” the premium can save the borrower a significant amount since the premium amount will be calculated based on a lower loan to value ratio. A bank that chooses not to use this method will charge significantly more for its mortgage insurance premiums. 

Another huge difference in mortgage insurance premiums is related to the loan amount. The middle loan amount range is considered to be $300,000 through $500,000 by one lender. Loans under $300,000 are in the lower loan amount band, while loan amounts over $500,000 are in the higher loan amount range. However, another major lender’s bands are slightly different with the middle loan amount range going up to $600,000. For someone borrowing between $500,000 and $600,000, the choice of insurer would make a significant difference in the cost of the mortgage insurance premium. 

In fact, if a borrower is using one of the banks that don’t choose to capitalise the premium, the fact that the loan amount used includes the premium may actually push the loan into the higher loan amount range, thus dramatically increasing the mortgage insurance premium. For example, a borrower who wants a loan in the amount of $495,000 will pay significantly more if the premium is not capitalised. The premium amount, which will surely be more than $5000, will push the loan amount into the higher range, thus causing a dramatic increase in insurance cost. These differences must be considered when choosing a lender. 

The two main mortgage insurance companies in Australia are QBE and Genworth. Some lenders may choose to insure some of the loans themselves, but this is rare. In the case where a lender does insure some of their own loans, they will typically insure loans with high loan to value ratios through an outside company. 

Determining the amount of mortgage insurance you will pay for your home loan can be a difficult process. It will depend on the lender you choose, as well as the insurer used by your lender. However, with the dramatic difference that can be made by something as simple as whether or not the lender uses the capitalisation procedure, it is important to shop around before making a final decision on the lender you will use. The easiest way to work out your premium is to use a mortgage insurance calculator.

If you have the money available, it may even be in your best interest to make a large enough deposit to avoid mortgage insurance altogether. If you cannot make such a deposit but would still like to avoid paying mortgage insurance, another option is to use a guarantor. A guarantor is someone who agrees to take responsibility for the repayment of your loan in the event that you cannot make the payments yourself. This is usually a family member, but in some cases could be a friend. He or she will use owned assets as collateral, which can lower your loan to value ratio enough to keep you from paying mortgage insurance.

In some cases, it may even be possible to have the guarantor sign a limited guarantee, which means that he or she will only be responsible for a portion of the loan. For example, if your loan to value ratio is 95% and the lender requires mortgage insurance for all loans with a loan to value ratio of 80% or more, you could ask a friend or relative to sign a guarantee for 16% of the loan amount, which will bring your loan to value ratio under 80%, thus eliminating the need for mortgage insurance.

Mortgage insurance can be very costly for home buyers. The cost of mortgage insurance is determined by the loan amount, the loan to value ratio, and the type of loan. The cost of mortgage insurance premiums also varies by lender based on the mortgage insurance company they use, as well as whether or not they capitalise the premium. Due to the fact that it is possible for premiums to vary by $10,000 or more, it is important to explore all of your options before deciding on a lender. Cheaper mortgage insurance can make one lender’s offer much more appealing than that of another. The borrower is usually only required to pay mortgage insurance premiums if the loan to value ratio exceeds 80% for standard loans or 60% for lo doc loans. If you want to avoid mortgage insurance altogether, you could put down a large enough deposit to bring your loan to value ratio under the applicable limit, or you could use a guarantor.