Lenders Mortgage Insurance

The Biggest Fee For Your Home Mortgage

Calculating LMI PremiumPeople who have not been affected by the housing market crisis in Australia may now be looking for the opportunity to purchase a home. Because of the global market downturn, property values and home prices have dropped throughout the world.

This means that there are big gains to be had for those people who can afford to purchase a home. However, when you find your home, there are a few things you should remember before jumping in to a mortgage head first. There are a few fees that are associated with your mortgage other than the monthly payment. For those who have a small deposit and need to borrow money from a lending institution, he or she will most likely have to pay lender’s mortgage insurance.

What is Lender’s Mortgage Insurance?

Lender’s mortgage insurance, or LMI for short, is a fee charged by the lender of funds in home loans. This fee is used to help protect the lender’s interest in the loan. For instance, if you have borrowed $200K and could not end up affording that amount, you would default on the loan.

The lending institution would not only be losing the actual loan itself, but all associated costs for originating and closing the loan. Therefore, borrowers are charged an upfront fee to help off-set any costs associated with a loan in default.

Do I Need It?

The answer is both yes and no. For those individuals who can afford a certain down payment on their loan, usually over 20%, he or she does not always have to pay an LMI premium. LMI is based upon one’s risk assessment for loan repayment. For example, those who only have a minimum down payment, possibly 3%, are considered high risk because he or she has not been able to save a significant portion of money for their purchase.

Oppositely, those who have a large down payment available and a solid job history may get the LMI fee waived. This is up to the discretion of the lending institution. Also, one should keep in mind that LMI insurance does not cover the borrower (home owner). This insurance is paid by the home owner as a requirement by the lender. Some loans that may require LMI would be:

- Property Investment Mortgages
- Construction Mortgages
- Owner/Occupier Mortgages

Please note that if you are making interest only repayments then some mortgage insurers will load your premium. As your loan will not be reducing over the term, there is a higher risk to the insurer and so a higher premium is charged.

What is the Cost of LMI?

When a lender starts to talk about fees, many home owners get a nauseous feeling in their stomach. One of the most feared sounds is that of the calculator adding document fees, attorney fees, LMI fees, and all other costs associated with loan approval that makes the ribbon on the adding machine sing.

However, LMI does not carry the unpredictability as other fees because it has been government regulated. LMI fees depend on the amount of the home loan, how much money was put down, and the length of the loan itself.

One of the leading providers in Australia for LMI is Genworth Financial. Genworth Financial can provide its customers with the purchase of LMI and help with the many other aspects of home mortgages. You cannot choose if your lender uses Genworth LMI or QBE LMI, however you can apply with a lender that uses these particular insurers, thus ensuring you get the lowest possible premium.

Calculating your equity

Equity scaleHow much equity do you have? Your home could be a hidden gold mine of equity, ready to be turned into cash for you to spend! The amount of equity you have really depends on the the value of your home & how much you owe to the bank. The difference is your equity.

Calculating your equity

Don’t worry it is easier than it looks! The formula is:

House value – Loan amount = Equity

So lets say that your home is worth $500,000 and you owe the bank $300,000 then the formula looks like this:

$500,000 – $300,000 = $200,000 in Equity

As a general rule if you draw down on equity such that you owe over 80% of the value of your home, then you may need to pay Lenders Mortgage Insurance (see below). Many home equity loans are restricted to be a maximum of 90% of the property value.

The difficult bit…

The difficult part is working out just how much your house is really worth. Real Estate Agents often give you an overinflated estimate of the value of your home. This is because then it is more likely that you may ask them to list the property for sale through them. There is so much media hype about prices going up and down it it actually quite hard to find out an accurate measure for the value for your home.

If you would like to know more about working out the value of your home for yourself then read this article on how to value a property.

Lenders Mortgage Insurance (LMI)

Lenders Mortgage Insurance is insurance that protects the lender in the event that you can’t repay your home loan. Lenders take out this insurance if your equity loan is for more than 80% LTV. The LMI premium charged is paid by you, the borrower, not the lender!

This can end up to be much more expensive than people think! If you are thinking of accessing your equity then use this Lenders Mortgage Insurance calculator to find out what your premium will be. Make sure you shop around! Different banks have different premiums, and they only rarely tell the general public what they are.