It is very important to understand that lenders mortgage insurance, LMI, does not protect the borrower. If a borrower requires insurance to cover mortgage repayments in the event they lose their income mortgage protection insurance or income protection insurance advice should be sought.
Lenders mortgage insurance is an insurance policy a lender may require for a loan over property. The lenders mortgage insurance is taken out to cover any shortfall if the borrowers default and the property is repossessed and sold for les that the amount that is still owed on the loan. Lenders mortgage insurance is often referred to as LMI.
Some lenders mortgage insure all loans while others only require mortgage insurance if the loan to value ratio increases over a certain percentage. Often the lenders who mortgage insure all loans pay for the premium themselves up to a certain loan to value ratio and after this loan to value ratio is exceeded the applicant is then required to pay the premium.
So how much is lenders mortgage insurance? Mortgage insurance premiums are usually calculated from a combination of the following factors;
- Total loan size. There may be one percentage of the total loan amount for loans between $0 and $300,000 and then another higher percentage for loan sizes between $300,001 and $500,000 an so on.
- Loan to value ratio. If the loan to value ratio is between 80 and 82 percent the percentage of the premium will be smaller that loan to value ratios between 82.1 and 84 percent. the percentage increases in each loan to value ratio bracket up to the maximum loan to value ratio the lender will allow
- Actual loan type. For example a full documentation loan usually does not have lenders mortgage insurance payable by the borrower if the loan to value ratio is below 80 percent. If the loan application is a low documentation loan then lenders mortgage insurance is usually payable by the borrower if the loan to value ratio is over 60 percent of the purchase price or property valuation, always whichever is the lower.
- Sometimes property location (certain locations may be unavailable)
- Stamp duty is added to the premium. Stamp duty varies between different states in Australia
Some lenders have loan products available that do not have an actual lenders mortgage insurance premium applicable at high loan to value ratios. There are some no deposit home loans available that have this feature. The loan has a fee attached to it similar in cost to a mortgage insurance premium but often a little cheaper and the approval of this fee is carried out internally by the lender rather than using a mortgage insurance company. In effect the lender is insuring the product internally.
There are other lenders that offer loan products that would normally have a lenders mortgage insurance premium payable up front by the borrower where the lender pays the premium and builds the cost into the loan with a slightly higher interest rate. Other products similar to this may not be actually mortgage insured but have a higher interest rate to cover the extra risk involved.
As mortgage insurance premiums are calculated from a combination of final loan size and loan to value ratio and a table of moving percentages are used for these calculations care must be taken when ever the purchase price, valuation, available deposit etc change at any time. A change of $1.00 could in certain instances move a premium calculation into another bracket and change costs more than anticipated.