Perhaps you’ve heard a mortgage officer talk about something called LMI. That’s short for a product known as Lenders Mortgage Insurance. That long term is a mouthful, so you can understand why the short version is preferred in everyday conversation.
You’ll hear about LMI in situations when a borrower is seeking a full-doc loan with an LVR—short for loan to value ratio—of more than 80%. LMI is usually a must for low-doc borrowers when the LVR is greater than 60%.
What is LMI?
LMI is simply a type of insurance that ensures lenders against the increased risk when giving out high LVR loans. Although LMI is designed to protect the lender, it will show up as one of the fees in a borrower’s loan package.
Here’s how LMI works: As you probably know, when a borrower defaults, lenders recover the outstanding portion of the mortgage loan by selling the property in question. Sometimes, however, the lender may face a situation known as “negative equity,” when the property sells for less than the value of the loan. When this happens, the LMI company pays the difference to the lender.
Cost of LMI
LMI providers use a sliding scale to determine the cost of this product. This sliding scale balances the loan amount against the LVR percentage to calculate LMI premiums for various scenarios. The higher the loan amount and LVR, the more the borrower will pay for LMI.
Two lenders who use the same LMI provider may quote different LMI costs to potential borrowers. This is because lenders negotiate their rates with Lenders’ Mortgage Insurance Providers individually and the rate cards they are given are not the same.
With the assistance of a knowledgeable mortgage professional, comparing different lenders’ LMI offerings is easy. Mortgage Providers consultants know the LMI marketplace and can help you compare cost variables between various lenders.
Can I choose the LMI Provider?
Although a few lenders offer their own LMI products, most use an independent insurance provider. Borrowers have no power to negotiate a better LMI rate with a particular lender, but the rates agreed between lenders (even when they have the same LMI provider) do vary. For this reason, it pays to compare different lenders’ LMI rates.
Different LMI Providers
Australia’s two primary Lenders Mortgage Insurance or LMI providers cover more than 60% of the country’s home loans. A few banks have ventured into the LMI business to provide cover from their own loans.
When you’re comparing Australian LMI rates, here are the providers you’ll be looking at:
- QBE (previously PMI)
- Genworth (GE)
- AIC (American Insurance Company)
- ANZ LMI (ANZ LMI)
- STG LMI (St George LMI)
- WBC LMI (Westpac LMI)
Other LMI Providers
A few lenders have decided to innovate with a modified type of LMI. Such lenders may offer self mortgage insurance, or they may ask borrowers to pay a risk fee rather than an LMI premium. This type of LMI alternative may be referred to as;
- REF (Reduced equity fee)
- LDP (Low deposit Premium)
These alternatives protect lenders in a similar way to LMI, but because they are not technically insurance products, the stamp duty and GST that the government collects on insurance policies does not apply. By avoiding insurance taxes, lenders save money and pass this savings along to their borrowers.
A little-known aspect of LMI is the possibility of seeking a refund farther down the road with your property investment. When you close or reduce your exposure on a high-LVR loan within two years, you may be eligible for an LMI refund. High growth in the value of your property may also reduce your loan’s LVR to a level that eliminates the need for LMI, paving the way for a refund.
At Mortgage Providers, we find that many borrowers have no knowledge of LMI refunds, but the amount of this often forgotten provision can be significant; generally, these refunds range from 10% to 50% of the LMI premium amount. It’s always a pleasure to help our clients get money back from an unexpected source.
Borrowers are not always aware of these LMI alternatives, but the brokers at Mortgage Providers can offer expert guidance on the full range of LMI products and alternative approaches. A relationship with a qualified broker can help you retain thousands of dollars and get the best deal for your mortgage.