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.

Get more information about Lenders Mortgage Insurance (LMI).

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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.