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What is Lender's Mortgage Insurance?
In most cases, when you are looking at borrowing an amount that is in excess of 80% of the purchase price (or valuation), the Lender will not approve the finance unless they can arrange for Lenders Mortgage Insurance.
Mortgage Insurance protects the lender against loss caused as a result of default by a borrower where the security property needs to be sold to recover the debt but the sale of the security property does not clear the debt.
Lenders Mortgage Insurance should not be confused with Mortgage Protection Insurance which protects the borrower against sickness, accident disability and unemployment.
The borrower is not covered in any way by Lenders Mortgage Insurance, in fact the insurer may seek recovery from you, the borrower, for any loss incurred after a claim is paid to the lender.
Lenders Mortgage Insurance protects the lender, not the borrower.
Benefits
Why have Lenders Mortgage Insurance?
For the Lender:
- It minimises the risk of loss to the lender on low deposit housing loans.
- It enables the lender to approve loans that they normally would not be able to.
- Maintains the lender's competitiveness in the home loan market.
- Provide credit enhancement for their housing loan portfolio.
For the Borrower:
- It reduces the amount of deposit needed which allows people to become home owners sooner.
- By being able to borrow more with less deposit you can use your surplus savings for other things
- For property investors, higher lending ratios enable the opportunity to maximise the benefits of negative gearing.
What is Covered?
- Loss of Principal
- Unpaid interest
- All reasonable recovery costs, such as:
- Legal fees
- Selling/marketing costs
- Repairs and maintenance
- Outstanding rates etc.
What is not covered?
- The borrower or the guarantor (if applicable)
- Break costs on fixed rate loans
- Physical damage to the security
- Fees and charges not directly related to costs incurred by the lender in recovery of the debt.
Types of Loans and LVR Parameters
The maximum loan to valuation ratio (LVR) is calculated on the lesser of the purchase price or the security valuation amount. In the case of construction loans, it is the lesser of the cost (land value plus cost to build) or the on-completion valuation. It should be noted that the insurer may choose to limit the LVR in certain circumstances based on the individual merit of the deal.
The lender or mortgage insurer may place certain limits on the maximum LVR or the maximum loan size available or for a particular borrower. As an example, the following table indicates how these limits may be structured. Values will differ between major capital cities.
| Loan Purpose | $0-$300,000 | $300,001-$500,000* |
|---|---|---|
| Home ownership purchase/construction | Up to 95% | Up to 90% |
| Residential investment loans | Up to 90% | Up to 90% |
| Home Loan refinance | Up to 90% | Up to 90% |
| Lines of credit for personal use | Up to 90% | Up to 85% |
| Vacant land loans - limited to $200,000 for suburban locations and $100,000 for country areas. | Up to 90% | Not Available |
| Loans to non-residents | Up to 75% | Not Available |
| Debt consolidation | ||
| Involving two debts | Up to 90% | Up to 90% |
| Involving more than two debts | Up to 85% | Up to 85% |
| Loans above $500,000, approval will be subject to the overall strength of the proposal | ||
Contact True Choice Home Loans for more detailed information concerning you individual circumstances.
How much does it cost?
The cost of Lenders Mortgage Insurance may vary from lender to lender depending upon the overall strength of the loan application and the underwriter of the insurance. As a guide, the following table illustrates what might be expected for loans approved on a Principal and Interest basis. (Different premiums may apply for interest only loans). In fact, each loan product, offered by each lender, offered to different borrower categories, may have its own premium matrix.
The premium is paid in full when the loan is drawn. Some lenders may add this cost on to the loan.
Example: A $250,000 loan @ 92% LVR = 250,000 x 1.38% = $3,450 plus stamp duty
| Loan to Valuation Ratio (LVR) | Up to $300,000 | $300,001-$500,000 | More than $500,000 |
|---|---|---|---|
| 0 to 80% | 0.35 | 0.45 | 0.70 |
| 80.01% to 81% | 0.46 | 0.59 | 0.90 |
| 81.01% to 82% | 0.48 | 0.61 | 0.93 |
| 82.01% to 83% | 0.61 | 0.78 | 1.23 |
| 83.01% to 84% | 0.66 | 0.85 | 1.33 |
| 84.01% to 85% | 0.76 | 1.01 | 1.57 |
| 85.01% to 86% | 0.86 | 1.09 | 1.72 |
| 86.01% to 87% | 0.94 | 1.20 | 1.88 |
| 87.01% to 88% | 1.00 | 1.27 | 1.99 |
| 88.01% to 89% | 1.10 | 1.41 | 2.20 |
| 89.01% to 90% | 1.20 | 1.50 | 2.39 |
| 90.01% to 91% | 1.33 | 1.71 | 2.67 |
| 91.01% to 92% | 1.38 | 1.77 | 2.77 |
| 92.01% to 93% | 1.48 | 1.86 | 2.95 |
| 93.01% to 94% | 1.60 | 2.05 | 3.21 |
| 94.01% to 95% | 1.69 | 2.17 | 3.38 |
| Insurance may be subject to a Minimum Payment. (for example $150) | |||
