When you have no say in which insurer insures your loan, you are at risk of paying too much for mortgage insurance, simply because you don’t know any different. It is important to assess as many lenders and their mortgage insurance rates as you can, so you can make a decision based on which lender will charge you the least. This forms an important part of the final decision on which lender suits your circumstances best and should not be under estimated.
Below is a list of frequently asked questions to get you started:
a) What is Lenders Mortgage Insurance?
Lenders mortgage insurance (LMI) is insurance that covers a lender in the event that a borrower defaults on a loan. It is not to be confused with mortgage protection insurance, which protects a borrower from loss of income arising from events such as sickness and accident and covers mortgage repayments for a period of time. Lenders mortgage insurance covers only the lender and offers no cover at all to the borrower.
b) When is Mortgage Insurance Required?
Mortgage insurance is required when the loan amount exceeds 80% of the value of the property being used as security. A bank appointed valuer, who will value the property for mortgage purposes, will determine the value. This type of valuation may be lower than a valuation for sale purposes or for stamp duty purposes. In the event that the loan is a low document type of loan, mortgage insurance is required if the loan to valuation ratio (LVR) exceeds 60%.
c) Why is it Required?
Mortgage insurance enables banks to lend more than 80% to clients. Prior to 1965, banks would only lend to a maximum of 80% of the value of a property. With mortgage insurance, clients can purchase with lower deposits and use their existing property to purchase investment properties when they may have less than 20% equity in their own property.
d) What is the cost?
There are a number of factors that determine the cost of mortgage insurance. Ultimately it depends on what the loan amount is, the loan to valuation ratio, the geographical location of the security property, which mortgage insurer and which bank. Premiums will differ from bank to bank and from insurer to insurer for exactly the same loan amount and LVR. As an example, a $350,000 loan at 85% LVR results in a mortgage insurance premium ranging from around $2,800 to over $4,000, depending on the lender and the insurer.
e) Is the Premium Paid Annually?
No. Unlike most insurance, mortgage insurance is a one off payment, paid at the beginning of the loan term. Taking the above example, if the $350,000 loan is taken out over 30 years and the LMI premium is $3,500, it equates to an annual payment of only $116.00.The cost of the insurance is also relative to the length of time the loan runs for.
f) Does the Insurer Approve the Loan?
Yes and mortgage insurers have more stringent lending criteria than banks and non-bank lenders. A lender may approve a loan, subject to LMI approval and the insurer may subsequently decline it. In this instance, the bank has been overruled by the mortgage insurer and cannot write the loan. Some banks have agreements with their mortgage insurers whereby they have the same underwriting authority as the insurer, so the bank on behalf of the mortgage insurer approves the loan.
g) What is LMI Capitalisation?
Capitalising of the premium is the process whereby the bank adds the cost of the mortgage insurance into the loan amount. For example, if you borrowed $350,000 and the mortgage insurance premium was $3,500, the bank would extend the loan amount to make it $353,500.
For advice on your mortgage insurance please visit www.equiti.com.au or if you have a question email John direct at email@example.com