All you need to know about lenders mortgage insurance
Lenders Mortgage Insurance (LMI) is an insurance policy for the loan itself and is designed to protect the lender. For example, in the event of a default by a borrower on a loan, the lender steps in to sell the property leaving the lender with a shortfall. The lender recovers this money from the mortgage insurer who underwrites the mortgage. For more information, see our related article on LMI.
How did lenders mortgage insurance come about?
Lenders Mortgage Insurance was introduced in the late 1980’s when lending institutions wanted to lend at a higher Loan to Valuation Ratio (LVR). Until the late 1980’s, most lenders lent to a maximum of 80% LVR, this was putting many families out of the property market with many only having 10% deposit. Hence government and financial regulators allowed lenders to lend at a higher LVR than 80% if they insured the mortgages.
When is lenders mortgage insurance required?
When a lender extends borrowing over 80% LVR, lenders come under certain financial regulations requiring them to insure the risk of the mortgage due to the higher LVR exposure. This higher LVR exposure puts the institution’s savings holders (deposit accounts) at risk in the event of wide spread default and losses to the institution. Lenders Mortgage Insurance was introduced to protect against this situation. It protects the Lender's money/mortgage, and not the customer ability to repay the debt.
In the case of most low doc (low documentation) loans, but not all, mortgage insurance is required on loans where the LVR exceeds 60%.
Lenders mortgage insurance cost?
There are varying costs of Lenders Mortgage Insurance depending on the LVR and the loan amount using a sliding scale. The cost of the LMI also varies from lender to lender. However, as a basic rule the LMI at 95% LVR will cost approx 2% of the loan amount. With a 90% LVR home loan, the LMI will cost approx 1.4% of the loan amount for a $300,000 loan, and at 85%, the cost of the LMI is approximately 0.8% of the loan amount. You could also try getting a mortgage at 85% LVR with no LMI or have the LMI waived!
The brokers at Mortgage Providers can give you an accurate costing of the LMI applicable to yourself using the various lenders of choice.
How many lenders mortgage insurers operate in Australia?
There are 3 main mortgage insurers operating within Australia. This number is down from 5 in early 2000.
However, in recent times some major lenders have created their own insurance companies to underwrite the LMI on behalf of themselves. This practice has become known as self mortgage insurance on behalf of a lender. In turn, the lender owned insurance companies are then re insured using external insurance companies. Many borrowers are unaware of this cycle nor does it really matter to them, but it is worth noting that the cost of the LMI is slightly higher.
The consultants at Mortgage Providers are aware of these distinctions, and can provide an accurate estimate of the cost of your LMI if it is applicable.
Capitalised lenders mortgage insurance
Most lenders will lend the borrower the cost of the LMI. When this happens it is referred to as capitalised or capitalising the Lenders Mortgage Insurance (LMI). Lenders will capitalise the LMI to an LVR of no greater than 100% LVR.
Alternates to LMI?
You can get an alternate to LMI otherwise known as a risk fee. This policy can be found with 2 lenders only, and is considerably cheaper than your normal LMI. Contact a Mortgage Providers broker today to discuss this.
Choosing a mortgage insurer?
Lenders have there own agreements with the mortgage insurers. In most cases, a lender will use only 1 lenders mortgage insurer. However, this is not always true with some lenders using the 2 main LMI providers in Australia. Hence when you choose a lender and you require mortgage insurance, you are in turn coming under the guidelines and policy of the lenders mortgage insurer.
If you were to use a lender with more than one provider, you will find that lenders policies and products slightly more flexible than a lender using only one LMI provider.
There are also cases where an LMI provider will enter into an open policy with a particular lending institution to an LVR like 92%. This means that a lender can have the discretion to approve a loan if it feels it is worthy without consulting its insurer and it will be given cover. Anything above 92% is then referred to LMI for its own assessment.
Your Mortgage Providers consultant can provide further details if this is applicable to you .
Lender mortgage insurance vs Mortgage repayment insurance
Lender Mortgage Insurance protects the lender. If a client defaults resulting in the need to sell the subject property, and the lender loses money, then the lender recovers their money from the Lender’s Mortgage Insurer.
Mortgage Repayment Insurance is an insurance policy taken out by the individual/borrower on his own accord to protect against his own inability to make mortgage repayments when they become due in circumstances like illness, disability or death. Mortgage Repayment Insurance is not a necessity on any borrower, although it is recommended by staff at Mortgage Providers to any prospective borrower.