Lenders Mortgage Insurance – do you know what you’re paying for?

More Aussies
are taking out home loans requiring them to spend thousands on Lenders Mortgage
Insurance (LMI), but do they really know what they’re paying for?

A 2018 survey found more than half of first-time borrowers mistakenly think this insurance protects them, when in fact it protects the banks – sparking calls from consumer group CHOICE for it to be abolished. ivermectin topical ivermectin topical fleas

Recently,
however, a ground-breaking new product has hit the market which promises to
take some of the sting out of LMI for mortgage holders.

What is
Lenders Mortgage Insurance?

To qualify for a home loan, you typically need at least a 20% deposit plus costs, meaning you will only be allowed to borrow up to 80% of the value of the purchased property. cvg “stromectol”

Some lenders do
allow homebuyers to borrow with a
deposit of less than 20%, but in this case they generally insist on you
buying LMI.

What does
LMI cover me for?

LMI does not
cover you for anything: it protects your lender against the risk that you
default on your loan repayments.

If you are
unable to repay your outstanding loan amount, your LMI insurer will reimburse
your lender and then ask you to repay any shortfall to them. If you don’t, they
can sue you.

How much
does LMI cost?

As a very rough guide, LMI can cost over $10,000 on a home loan of $500,000 for which you’ve saved a $50,000 deposit.

As the
borrower, you have to pay for it even though you have no say in how much it
costs. And you don’t get the option to shop around for a better deal, because
you are forced to use the LMI chosen by your lender.

How do I pay
for LMI?

LMI is the only
insurance in Australia where all premiums must generally be paid up front in
one lump sum, instead of in instalments.

You can pay
your LMI in full when you loan is approved – but this is likely to prove quite
difficult if you’re already so cash-strapped that you couldn’t afford a full
deposit.

Or your LMI can
be capitalised and repaid along with your loan – making repayments easier to
shoulder, but far more expensive for you in the long run, as you’ll be paying
interest on both your loan and your LMI.

Heavy
criticism

LMI is big business, with APRA figures showing the share of new home loans with a loan-to-value ratio above 80% increased to over 22% in the June quarter.

But the Productivity Commission inquiry into Competition in the Australian Financial System (2018) was scathing about this form of insurance. It recommended government intervention in the LMI market to protect the interest of borrowers, saying:

LMI discourages
home loan refinancing for a better home loan deal;

There is little
incentive for competition on LMI prices, since the borrower pays for it but has
no control over how much it costs (this is decided by the lenders and LMI
providers);

LMI doesn’t
achieve its goal of helping low-income earners get onto the property ladder: it
drives up property prices, and most of the benefit goes to middle and
high-income earners.

CHOICE CEO Alan
Kirkland agreed, saying: “It’s an extremely opaque market … it’s very hard to
justify the existence of LMI in its current form.’’

Can I get if
an LMI refund if I pay my loan up early or refinance?

If you don’t
ask, you’ll never know, so it’s certainly worth requesting a refund on your
LMI.

However,
insurers generally only offer refunds if you cancel the policy within one or
two years, and then will sometimes only return as little as 20%. And some
lenders won’t agree to process LMI refunds for any loan terminated before
maturity.

Sometimes the
hefty price of LMI discourages people who still owe more than 80 per cent of
their original loan amount from refinancing for a better deal – the very people
who would benefit most. There is now an alternative way to pay for LMI that
could address this issue. See below ….

Who provides LMI?

There are two major LMI
providers in Australia, Genworth and QBE, and some of the banks operate their
own LMI subsidiaries or self-insure – for example Commonwealth Bank offers a
one-off fee called a Low Deposit Premium that works like LMI.

LMI
with monthly premiums

This month, Genworth has
just released a new Australian-first LMI product that is paid in monthly
instalments rather than in one lump sum up front. This means a greater portion
of a home loan can be used to support the purchase of the property and makes it
much easier for borrowers with LMI to refinance.

“To address the increasing demand for “entry level” first homes which
are held for less than five years we recently announced a new monthly premium
LMI offering,” said Genworth Mortgage Insurance CEO Georgette Nicholas.

Ms Nicholas said that borrowers “can pay the LMI premium in instalments over time, which means a greater portion of their loan can be utilised to support the purchase of their first home. para q sirve ivexterm tabletas

“Importantly, our new monthly premium LMI provides borrowers
with the flexibility to refinance at a later date without the need for a refund
of LMI premium,” said Georgette Nicholas.

Mortgage
Protection Insurance

Many homeowners
stress about being able to pay their mortgage if something goes wrong. LMI
can’t help with that, but another form of insurance called Mortgage Protection
Insurance (MPI) is designed for this purpose.

MPI can cover
your mortgage repayments if you should suffer injury, accident, death or
redundancy.

However before
buying MPI, you should speak to a financial advisor or other expert to see if
you may be better off relying on income protection insurance and/or life
insurance, which can provide wider protection than MPI and may be more
cost-effective too.

How to avoid
paying for LMI

Save a 20%
deposit

Buy a cheaper
property

Arrange a
guarantor (though some banks are cutting down on this)

Become a
doctor! (lenders exempt some high-income people such as doctors and lawyers
from LMI)

See if you
qualify as one of the 10,000 borrowers who will be able to buy a home with just
a 5% deposit and no LMI through the government’s First Home Loan Deposit Scheme, which starts in January 2020.

Shop around –
rates for LMI vary widely between banks, so compare lenders to see who has the
best deal for you.

Keep up with the very latest deals
from lenders at InfoChoice, and use
our Home
Loan Calculator to see what a difference
lower LMI could make to your mortgage repayments.

The information contained on this web site is
general in nature and does not take into account your personal situation. You
should consider whether the information is appropriate to your needs, and where
appropriate, seek professional advice from a financial adviser. If you or
someone you know is in financial stress, contact the National Debt Helpline on
1800 007 007.