Home Loan Rate – Australia

If you are in the market for a new home, you may have heard or seen the term “lenders mortgage insurance” or “LMI”. Each time a bank approves a home loan, they are at risk of the borrower defaulting on that loan. If the lender has to foreclose on a property but does not sell the property for the outstanding loan amount, they lose money. LMI protects the lender against that loss.

LMI is usually obtained when the amount of the home loan requested is above 80% of the property value for a traditional loan. For a non-traditional loan, such as a “Lo Doc” loan, LMI is obtained for amounts over 60% of the property value. The term for this percentage calculation of amount borrowed compared to the value of the property is known as loan-to-value ratio (LVR).

How Much Does LMI Cost?

Each lender has their own LMI rates, and they base those rates on certain criteria: loan type, loan amount, and LVR. Another amount to add to the LMI cost is the government duty on insurance premiums, which can be anywhere from 5% to 10% of the premium.

For example, let’s assume you have a loan of $100,000 and an LVR of 90%. The bank’s rate for that loan amount combined with that LVR is 1.22%. Let’s also assume that the government duty is 10%. So, on a $100,000 loan, your LMI would be $1,342. ($100,000 loan x 1.22% premium rate x 10% duty)

Banks have different rates for different types of loans. For instance, one person could have a traditional loan of $100,000 while their neighbour has a Lo Doc loan of $100,000. They both could have the same LVR of 80%, but their premium rate could be different. Even though they are neighbours living in the same state, their government duty would be different because their premium rate is different.

Traditional Loan: $100,000 x 0.41% premium rate x 10% duty = $451
Lo Doc Loan: $100,000 x 0.59% premium rate x 10% duty = $649

Luckily, LMI is a one-off premium that is usually paid at the end of the loan term.

Who Obtains the LMI Policy?

It is the lender who applies for the LMI policy, and it is the lender who is the beneficiary of the policy. This coverage does not protect the borrower in the event of loan default. However, the lender must provide information to the insurance carrier relating to the financial stability of the borrower in order for the carrier to approve the LMI policy.

Why Does the Insurance Carrier Need My Information?

The insurance carrier must also approve your home loan. These carriers usually have stricter guidelines than the bank for approving loans, especially those that are at higher risk. They will review the credit history, employment history, and sometimes the savings history to determine if a condition exists that may jeopardize your chances of repaying the loan amount.

Some lenders have and Open Policy with their insurance companies. Also known as Delegated Underwriting Authority (DUA), this relationship allows the lender to approve the mortgage on behalf of their mortgage insurer. This benefits the borrower because the bank will have the ability to approve the loan without the fear of the LMI provider declining it.

What is the Benefit of Having LMI?

Lenders can use LMI as a tool to enhance the borrower’s perceived credit. By using the insurance in this way, it allows them to offer more innovative and cost-effective mortgage products to the borrower. Typically, lenders prefer to only approve mortgages for 80% of the property value. However, if the property is valued at $500,000, and you only have a $60,000 deposit, having LMI could be the difference between being approved for the home loan without the extra $40,000 and being denied for the loan altogether.

Why Must Borrowers Pay for LMI?

Most lenders will have the LMI wrapped into the borrower’s payments as a condition of the loan. While it may not seem fair for the borrower to have to pay for insurance that seems to only benefit the bank, the borrower should remember that LMI opens the bank’s ability to approve what may otherwise be a high-risk loan. By using LMI, the bank is able to offer mortgages to borrowers who otherwise would not have the desired LVR.

Sometimes a borrower is ready to buy a home, except they do not meet the minimum deposit requirements. Borrowers who benefit from LMI include:

• First time home buyers
• Low- or no-deposit home buyers
• Buyers who have the required deposit amount, but wish to reserve some

Knowing that the lender may require the LMI to be paid by the borrower, it is wise for a borrower to research which lenders have the lowest LMI rates. Unfortunately, the bank is not likely to allow you to choose which insurance carrier the LMI on your home loan is through. Because banks take out numerous LMI policies daily, most have agreements with various carriers for discounted rates on all their policies. The insurance carrier that you found quoting the lowest LMI rate may not be the lowest-rate carrier the bank can use.

Can the LMI Be Capitalised?

Some lenders will allow LMI Capitalisation, where the premium is added on to your loan. What this means for the borrower is that instead of borrowing strictly the loan amount, they will be borrowing the loan amount plus the LMI premium. For example, if you borrow $100,000, and the LMI premium is $250, then the total amount you would borrow if the LMI is not capitalised would be $99,750. With the LMI capitalised, the total amount you borrow would be $100,250.

What Types of Loans Does LMI Cover?

Depending on the relationship with the lender, LMI can cover traditional and Lo Doc loans, such as:

• Owner-Occupied Home Loans
• Home Improvement Loans
• Extension Loans
• Property Investment Loans
• Construction Loans
• Principal and Interest Loans
• Interest Only Loans

Is LMI Required?

LMI is not mandated by law. Some lenders will approve mortgages without LMI, but those loans are likely to have a higher interest rate and/or an additional fee. These lenders have the advantage of not being forced to adopt the policies of the insurance carrier over their own policies. If you wish to avoid paying LMI, it is best to wait until you have the minimum deposit required (usually 20% or more) before applying for a home loan.

Can I Get LMI to Cover Me?

The simple answer is no. However, there are other insurances that will cover the mortgage payments if you are made redundant, fall ill, or die. However, these types of insurance are typically paid on an annual basis, unlike the one-off payment for LMI. If you are interested in purchasing a policy to protect you, ask you insurance broker for mortgage protection insurance or income protection insurance. Keep in mind, though, that having these insurances will not prevent the lender from requiring LMI.

Who Regulates LMI Carriers?

The Australian Prudential Regulation Authority (APRA) is the governing body that sets the prudential standards and reporting requirements to which LMI carriers must adhere.

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