September 16, 2021

Monthly Lender’s Mortgage Insurance

Monthly Lender’s Mortgage Insurance

A new option is now available to pay for lenders mortgage insurance by a monthly instalment option.

 

When do you need lender's mortgage insurance?

 

Lenders mortgage insurance (LMI) is required when your home loan deposit is less than 20% of the property purchase price. LMI is an insurance premium that you have to pay. It protects the lender against any financial loss if you are unable to continue to make your home loan repayments and default on the mortgage. Sadly it does not protect you in any way, however, there are other insurances that can help protect you against, say, sickness and accidents you might suffer in the future.

 

What's the difference between genuine and non genuine savings?

 

Genuine savings is where you can demonstrate that you have saved the entire deposit yourself, overtime. The amount is usually at least 5% of the purchase price over six months or more. 

 

Some lenders/insurers will allow your rental history statement to be used to show genuine savings if you have a clear history of making your rental payments on time.

 

Non genuine savings is where you have a deposit, but it has not been saved by you over time. An example would be monies that were gifted, an asset you sold like a car or even some crypto currency. 

 

Your LMI options

 

Upfront payment

The premium is paid upfront when you settle on the mortgage with no interest been paid on the lmi premium. You must be able to show that you have the money for this when you apply for your home loan. 

 

Many don't have the money now, meaning it will prolong the time of when they can get into the property market and property prices will likely be higher when you have saved up the money. 

 

Capitalisation

The premium is added on top of your mortgage, a common arrangement, but not usually possible with high LVR mortgages such as 95% home loans or 90% investment loans. One lender offers to add the LMI fee on high loan to value (LVR) mortgages. 

 

LVR = loan to value ratio 

Loan amount /property value

$450,000     / $500,000 x 100 = 90%

 

Allows you take action now without having to wait and save up extra money. Your mortgage repayments, paying interest on a higher loan with the premium added to your mortgage. You will need to demonstrate you can afford a slightly higher mortgage and your borrowing capacity may reduce a little. 

 

LMI Monthly premiums

The premium instalment is paid monthly with your home loan repayments until you have 20%equity in your property. This is a really new option with one insurer and not many lenders have this option on offer to clients. 

 

Your income will need to be high enough to show that you can service the commitment of both the new mortgage and monthly lmi installments.

 

Avoids you having to save up the lmi premium and get into the market sooner. You may even come out ahead depending how fast your property increases in value. If you refinance the instalments will stop.

 

How much does it cost?

 

The premium is usually between 1%-2% of the mortgage, however there are several factors that will determine your premium:


  • What     is the loan amount?
  • How     much is your deposit?
  • Is     the property for investment purposes or to live in?
  • Which     lender did you choose?
  • How     much is the stamp duty?

 

Check out the Genworth premium calculator for an estimate, premiums will vary between lenders and insurers.

 

Who are the insurers?

There are only a couple of insurers that provide this service in Australia. Some lenders charge a risk fee instead where they internally take on the risk if you default on your mortgage.

 

How do I apply for LMI?

When you apply for a mortgage, the lender will assess your application, then forward it to the mortgage insurer for approval. The lender will arrange the cover on your behalf.

 

How can we help?

We can show you how to invest with just $15k in savings where you will not be required to pay for the LMI premium upfront. By all means, if you have the money, please do so. Our model is based on you either capitalising the LMI premium to your mortgage or paying monthly LMI premiums.

 

Disclosure

We do not provide finance advice and are not licensed to provide any credit services or advice. We refer our clients on to lenders and brokers who hold an Australian Credit License and can assist you with implementing these solutions.

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