Home Loan Rate – Australia

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.

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.

Get more information about Lenders Mortgage Insurance (LMI).

Try the LMI calculator today.

What are genuine savings?

The majority of Australian lenders have a policy requiring you to have “genuine savings” before they will approve your mortgage. In effect, it is proof of your ability to manage your money effectively and live within your means.

Genuine savings is not necessarily money saved in a savings account, it can come in many forms and each lender has their own policies regarding what is and what is not genuine savings. As a general rule if you are borrowing over 80% LVR then you need to prove 5% of the purchase price as genuine savings.

Common genuine savings types

These types of genuine savings are regularly accepted by most major lenders:

• Savings that have been made or held in an account for three months or more (including First Home Saver Accounts).
• Shares or managed funds that have been held for three months or more.
• Term deposits that have been held for three months or more.

Ideally your savings should be held in a separate account to your day to day spending and the balance of your account should be increasing over the three month period. Any large lump sum deposits during the three month period will not be considered as genuine savings.

What is not genuine savings?

The deposit for your new home can come from many different sources. The vast majority of sources that do not involve you saving the money yourself will not be considered as genuine savings. Some examples of deposit types that are not accepted as genuine savings are:

• Financial contributions from your family or parents (e.g. gifts / loans).
• Loan from a friend.
• Personal loans / cash out from credit cards.
• Vendor / builder rebates, cashbacks or discounts.
• Pay in advance from your work.
• Money saved in cash (i.e. not in a bank account).

As a general rule if it doesn’t meet the genuine savings criteria listed above then it will not be considered as genuine savings.

Don’t worry too much! You may qualify for a no genuine savings mortgage, if you apply with the right lender this requirement may be waived. In most cases the cost of a no genuine savings home loan is very similar to a loan with a requirement for genuine savings.

Grey areas…

The policy used by lenders to assess genuine savings is very complex, and in addition to this there are some types of savings that can be accepted on an exception basis. The secret to getting approved is to apply with a lender that accepts the type of genuine savings that you can provide.

Some examples of genuine savings that may or may not be accepted by the lender are:

• Equity in existing real estate (i.e. you own a property already).
• Extra repayments on your debts made over the past three to six months.
• Rent payments (must be through a property manager and have been 12 months in your current residence).
• Tax refund (must be currently renting to be accepted).
• Inheritance (must be currently renting to be accepted).
• Sale of a non-real estate asset (must be currently renting to be accepted).
• Commission or bonuses from your job (must be currently renting to be accepted).
• Money that comes from a non-genuine source (e.g. a gift) that have been held in a savings account for three months or more.

Please refer to the specialist mortgage brokers at the Home Loan Experts if you would like to know more about using one of these methods to prove genuine savings. You can view their page on genuine savings for more information.

Do the major banks require genuine savings?

Yes, at present all of the major banks have a requirement for genuine savings. ANZ & CBA tend to be quite strict with this requirement while Westpac (WBC), NAB & St George (SGB) have slightly more flexible policies. Please note that all of them are relatively strict when compared to lenders that do not require genuine savings at all and have similarly priced mortgages!

In addition to this the two major LMI providers Genworth and QBE LMI both have requirements for genuine savings under their standard products. Both will accept no genuine savings loans under their non-standard LMI products however the LMI premium may be higher and credit assessment will be significantly stricter.

Lenders Mortgage Insurance or LMI is often a must once the loan to value ratio (LVR) of the property is 80% and up.  However there are a number of loans that can go over 85% LVR but will not require you to pay LMI.  These types of loans can save you a lot of money, as you need not to worry about LMI premiums.  There are only certain fees to pay in exchange for the fact that there is no LMI being charged to you.

Another tested way to avoid LMI altogether is to either make a sizeable deposit with the bank.  This usually amounts to 20% of the total value of the property.  You can also avoid going above 80% LVR to keep banks from charging you LMI.  These are two tried and tested ways of avoiding additional LMI costs and paying no LMI whatsoever.

This means that if you would like to get into the real estate market much earlier, yet do not have any funds to make a deposit, or would really like to get a loan of 80% or more of the property’s total value, then expect to be required to pay LMI as most banks and lenders will charge you LMI premiums.

The experts on home loans have access to those banks and lenders who are willing to go over 80% and yet do charge no LMI whatsoever.  However, be warned that interest rates and additional fees may be applied, so the costs may actually be the same as paying LMI.  This means it would be best to make use of a mortgage insurance calculator before getting a loan with no LMI.  For all you know, it could cost much less than getting a loan without LMI in the first place.

If you do need to apply for a loan where mortgage insurance will be applicable then you will be subject to additional credit criteria. As a general rule you may need to:

• Have 5% in genuine savings.
• Have a clear credit history.
• Have stable long term employment.
• The property must be in good condition in a major area (capital city / regional centre).
• Pass a credit scoring algorithm.

If you are applying for a mortgage over 80% of the property value then discuss your situation with a qualified mortgage broker to find out where you stand. Putting in several applications with different banks will lower your credit score for future applications. The best strategy is to go for one application, and one approval.

Impulse buying is easy if you have enough funding, or enough credit,  There is no need to wait or save up for a purchase, and often the only drawback is that you have to pay a little more for instant loans.  The idea and concept behind Lenders Mortgage Insurance or LMI is similar.  You get to purchase a house with only a minimal deposit or no deposit at all.  Of course few would call buying a house or any form of real estate impulse buying, but the concept is the same.

However, the main reason that LMI exists is for the protection of the lender.  What the borrower does at the start when LMI is required is to pay a premium of a considerable amount to cover the property mortgaged.  This enables the bank or lender to take more risks in case of inability of the borrower to make the required repayments, and when the property is sold at auction, the sale is not enough to cover the costs of the loan.

Although it may seem like LMI can only benefit the bank or lender, there are also incidental benefits to the borrower.  The most obvious benefit is the fact that the borrower is able to immediately purchase the property.  This saves the borrower from needing to pay rising housing costs, and he can limit himself to interest payments and the payment of the required premiums.

The problem with LMI is thay while lenders and banks make use of it, the identity and rates and actual costs related to LMI are often left undisclosed to the prospective borrowers.  Due to the fact that the fees are left undisclosed, then it becomes more difficult for the borrower to budget possible expenses.

In order to get a more accurate figure of how much LMI costs it would be best to consult the home loan experts.  They can provide you with a free LMI Calculator to give you a clear idea on how much LMI you have to pay depending on your particular circumstances.

When one would like to get a home loan in Australia, often it involves LMI or Lenders Mortgage Insurance.  Lenders mortgage insurance is as worded, protection for the lender or bank.  Basically it is a premium paid by the borrower to insure the bank in case the borrower is unable to make the necessary repayments.  If you are very behind with your loan repayment, your property may be sold, and if the sale of the property is not enough to cover the loan, then it is the insurance company who answers for the deficit.  However, just because it is made for the benefit of the lender, it does not mean that it cannot be helpful to the borrower.  It can be of help to the borrower when they don’t have enough savings for deposit, and enable them to enter the real estate market earlier.

LMI is also used when your loan to value ratio is at or above 80% of the value of the property.  Loan to value ratio or LVR is another term that is intimately connected to LMI.  Where there is a high enough LVR, usually LMI is required.  To illustrate LVR, for example you would like to purchase a property worth $1,000,000.00.  The 80% LVR that would require LMI is simply 80% of the $1,000,000.00, which is $800,000.00.  Thus when you get a $800,000.00 loan then you will be required to pay LMI, at a very high premium.

Another problem with LMI is that there are so many providers of this type of insurance.  Because there are many providers, a borrower is often at a loss on how to compute the costs in relation to LMI.  To add and complicate things, banks and lenders also do not disclose who their LMI provider is, thus the borrower is left in the dark as to how much LMI would cost.

Thankfully there is an LMI Calculator out there available in order to help the borrower accurately determine how much they would need to save to pay for the LMI premiums, and the other costs in relation to any loan they wish to get.  This will ensure that you have enough funds prepared when applying for your home loan.

Rising housing prices in recent years have made it very difficult for many home buyers to save the deposit. Lenders have recognized this and have created the no deposit loan product.

No deposit loans are generally available for new and established buildings, owner occupied, as well as for investors. To qualify for a no deposit loan you need to be an Australian Citizen or permanent resident and currently living in Australia.
Borrowers often need to acquire lender’s mortgage insurance where the Loan to Value Ratio (LVR) exceeds 80%. Generally, the higher the LVR, the higher the premiums. Hence the premiums on a no deposit loan can be large.

Combining stamp duty exemptions and First Home Owners Grant, no deposit loans allow borrowers to gain a foothold in the market based on their ability to service the mortgage rather than having the savings required to qualify for a more mainstream loan with deposit.

No deposit loans can also be a useful tool for investors wanting to take maximum advantage of leveraging.

While no deposit loans can be secured for similar rates to standard home loans, you should be aware that there is the risk of ending up in negative equity. For example, you purchase a house for $300,000 borrowing the full amount and the property market falls by 10%, you now owe $300,000 for a property that is worth $270,000 – that’s a shortfall of $30,000 you need to recover.

As with all loans, make sure that you borrow within your means. Work out a budget, stick to it, and do not borrow more than you planned just because it is available. Also, consider the property market that you are buying into: Are the prices rising or falling?