MORTGAGE Insurance is a once-off cost on new Australian mortgages charged by lenders when you borrow more than 80% of your home or investment property in Australia
You may incur this insurance charge when you take out a mortgage with a lender, but often it may not be clear why, or in what circumstances it is charged, or how it is calculated. Lenders Mortgage Insurance or LMI as it is frequently referred to in the finance industry in Australia, only protects the bank or lender, in the case of loan default or non-payment by the borrower. This means if you do not pay the mortgage the bank is protected from losing any money that it is outstanding on the loan, after your property is sold.
Essentially, if you are in default of your mortgage contract, and the bank exercises its legal right to re-possess the property (and ultimately sell it), then the insurance company will compensate the bank for the difference between the amount of the loan outstanding and the sale proceeds, if the sale proceeds are lower than the loan amount outstanding. Furthermore, it is very possible that the insurance company will look to recover its own financial loss in this case, from you — the borrower, or guarantor.
It is important therefore to understand you are not protected in any way by paying LMI at the beginning of your loan. The only way to protect yourself and your family from financial stress in the event you cannot pay your mortgage is through taking out your own separate mortgage protection insurance cover, or check to ensure you have sufficient life, disability and income protection type insurances in place.
Whilst no-one wants to pay the charge, it does mean that borrowers with lower deposits can get into the property market, when they have less than 20% funds to contribute. This keeps the property market moving along and first home buyers in particular can have more loan options. It’s something apparently lacking in the UK mortgage market.
How is LMI calculated? LMI is not a flat fee or fixed percentage amount. In fact the premium varies according to the actual percentage of property-price you borrow. For instance if your loan amount is 82% of the value of the property (just over the threshold where LMI begins) your premium will generally be between 0.4 — 0.7% approximately of the loan amount, with the actual percentage depending on the lender and the actual insurance company used by the lender.
This premium will increase as the required loan amount increases as a proportion of the property value up until for example, 95% of the property value, when the LMI will be approximately between 3-4% of the loan amount. Note that the final premium amount will be calculated precisely by the lender and included in loan offer documents.
In the event that you refinance your loan later on, and you still borrow more than 80% of the current value of the property, the lender will require that you pay Lenders Mortgage Insurance at that time as well.
Recently the two mortgage insurance providers in the Australian market announced changes to the way insurance is calculated, adding loaded fees for applications that contain certain characteristics. Lenders have not yet applied all the changes and seem to be interpreting them differently at this moment, so that LMI fee estimates are difficult to finalise at present. These additional fees relate to applications that include borrowers who need cash advances of equity; are self-employed, are refinancing and/or have loan terms greater than 30 years.
You therefore need to be careful when calculating estimated loan costs related to any property purchase in Australia, especially if you need greater than 80% of the purchase price or property value (in which case you will be affected by the current changes). Professional advice is the best way to interpret how the changes might affect you.
Daniel Shillito is a Financial Adviser, CPA and Expat specialist at Aussie Finance and Property Group, qualified both within Australia and throughout Europe. Daniel can be contacted on Ph. 020 3239 0479 or visit www.aussiefpgroup.com
(AAP Image/Dan Peled)