Blog

5 Things You Should Know about Mortgage Insurance

May 3, 2017 | Purchasing Property

Mortgage insurance, also commonly known as lender’s mortgage insurance or LMI, is used to protect lenders in case a borrower defaults on their loan. It is important to understand that LMI does not give the borrower any protection and in fact the insurer could come after the borrower for any shortfall in recovered funds.

The Australian Prudential Regulation Authority (APRA) has standards for mortgage insurance for both banks and mortgage insurance providers. This is to ensure that these financial institutions are capable of withstanding some risk and are sufficiently protected in the case of a high number of defaults. In fact, it was the presence of sound mortgage insurance practices that helped protect Australia during the global financial crisis.

While it may seem that LMI is just one more hurdle to doing business as mortgage insurance providers tend to be stringent when it comes to approving a policy, when you step back and look at the overall picture, LMI plays a vital role in stabilising Australia’s property markets. Ultimately, it provides benefits to both property purchasers and lenders.

It pays to be well-informed, as such here are the five most important things you should know about mortgage insurance.

1. 20% Is the Golden Number  In general, for a home loan that finances more than 80% of the purchase price, mortgage insurance is required and is organised by the lender. This for full doc loans, for low doc loans, which are considered to come with more risk, LMI is typically required for more than 60% of the property purchase price. The idea is that the more savings a borrower has, the less risky they are to a lender. This isn’t based on opinion, but rather on historical data.

This means that in general if you have a deposit of 20% or more for a property then you won’t have to pay mortgage insurance and you’ll save yourself a lot of money.

2. There Is a Way Around LMI, but the APRA Cautions Against It  Still, with the high property prices in Australia today, waiting to save up $120,000 on a $600,000 property, for example, isn’t always realistic.

There is one way to avoid LMI that doesn’t involve a sizable savings account: guarantor loans. By securing a guarantor, you can borrow up to 105% of the purchase price of the property. Guarantor loans are on the rise in the wake of rising housing costs; many Australians are getting help from their parents to enter the market by using their properties as a guarantor.

3. Mortgage Insurance Costs Vary Based on These Two Factors  There is no set cost of mortgage insurance. In Australia, unlike other countries, mortgage insurance providers are privately owned, and generally a bank has a relationship with only one insurer. To determine how much mortgage insurance will actually cost a borrower, a sliding scale is used, based on the amount of the loan and the loan-to-value ratio or LVR.

This means that for borrowers who don’t have a 20% deposit, it is possible to reduce the amount of mortgage insurance you’ll pay by negotiating a lower purchase price, or by putting in more of a deposit.

4. Mortgage Insurance Is More Common than You Think  Mortgage insurance is widely used in Australia. It is estimated that more than one-quarter of all Australian housing loans are covered by mortgage insurance. This demonstrates how useful LMI has been in keeping the property market going. Without insurance, many of these properties wouldn’t have been purchased.

5. LMI Standards Are Subject to Change  Banks and borrowers aren’t the only ones who have to prove their financial strength in order to play in the Australian property market. The lenders mortgage insurance companies are subject to intensive supervision as well. In fact, they undergo ongoing monitoring to assess their risk level and financial stability.

It can be a challenge to keep up with all the rules and strategies of property investing, especially when you’re new to the scene. The experts at Clever Finance Solutions are always available to offer advice when you need it.

 

Recent Blogs

Navigating the Australian Property Market as a New Investor

Navigating the Australian Property Market as a New Investor

I’ve had the pleasure of assisting many clients in taking their first steps into property investment. One common concern I often come across is the challenge of saving up for a deposit. The good news is there are alternative paths, especially if you’ve been a property owner for some time. The equity in your existing property can serve as a valuable resource for your initial investment, potentially allowing you to enter the market without using your savings.

read more
Investing in Property: Demystifying the Process and Exploring Mortgage Options for Property Investors

Investing in Property: Demystifying the Process and Exploring Mortgage Options for Property Investors

Navigating the details of property investment requires a strategic approach, especially when considering the dynamic landscape of the Australian real estate market. This blog aims to provide an examination of the investment process and delve into tailored mortgage options specifically designed for property investors.

read more
Demystifying Mortgage Interest Rates: Fixed vs. Variable – Which One is Right for You?

Demystifying Mortgage Interest Rates: Fixed vs. Variable – Which One is Right for You?

One of the decisions you’ll face when buying a property is choosing between a fixed or variable interest rate. Understanding the nuances of these two options can have a profound impact on your financial journey. In this blog, we’ll demystify mortgage interest rates to help you make an informed decision tailored to your circumstances.

read more