/When do I need lenders mortgage insurance to buy my home?

When do I need lenders mortgage insurance to buy my home?

Updated

May 13, 2019 12:27:56

By now you’ve probably heard about the Government’s new policy for first-home buyers.

The Government has promised if it is re-elected — although Labor has also backed the scheme — that home buyers will only need a 5 per cent deposit, and not the standard 20 per cent, or thereabouts.

Some experts have welcomed the scheme, suggesting this could see borrowers save money on mortgage insurance.

But what is lender’s mortgage insurance (LMI) and how does it affect your ability to borrow?

This is what we’ve found.

Why do I keep hearing about lenders mortgage insurance?

Basically, if your house deposit is less than 20 per cent of your property’s value (as assessed by the lender), your bank might require you take out LMI.

The idea is that if you have less than a 20 per cent deposit, you might be seen as a higher risk because your loan-to-value ratio (LVR) is more than 80 per cent.

So banks require you to take out an LMI to protect them from losing money if you cannot afford to pay your home loan repayments.

“Simply, LMI is insuring the gap between whatever the bank recovers through a legal process of mortgage possession and sale of the property and whatever the loan amount costs,” Mr Morgan said.

This is important to note because some people believe LMI might protect them if they default. It doesn’t.

Wait, so I’m paying for the bank to have insurance?

Yup. Basically LMI works like any kind of insurance policy, where in the event that you default on your loan the bank can make a claim to protect it from losing money.

What’s the process for applying for a home loan?

  • Save for a deposit
  • Get pre-approved for a loan
  • Start looking for a house
  • Think about buying at auction or through private sale
  • Remember the additional costs

For more information, you can
check out the saving to settlement guide here.

According to Canstar, it might seem that there is a benefit to the borrower from LMI, but by reducing the risk to the lender “LMI allows them to lend larger amounts and approve more home loan applications”.

Mr Morgan says it is effectively “dead money”.

“It’s something the borrower pays for the privilege of borrowing, and the insurance protects the lenders,” he said.

“And the borrower is still going to be looked to by the insurance company if they do default.”

Do I pay the same LMI no matter what my deposit?

Nope. The cost of your LMI usually depends on your loan-to-value ratio and the amount of money you borrow.

According to Canstar, other factors can include:

  • The amount of deposit you have
  • Whether the property is for investment or to live in
  • Whether you are a full-time or casual employee
  • The insurer used by the financial institution

ANZ says the cost of LMI can be paid as a lump sum, although some lenders may let it be added to your loan amount and paid off with your loan repayments.

But in that case interest will be charged on the cost of the LMI.

So how will this Government scheme change things?

We’re not exactly sure. But it would reportedly allow borrowers to avoid paying thousands of dollars in LMI.

Under the new $500 million scheme, which would come into effect on January 1, 2019, the Government would guarantee the additional amount needed to reach the 20 per cent threshold.

It would be available for first-home buyers with an income of up to $125,000, or couples with a joint income of up to $200,000.

“The benefit is that they won’t pay lender’s mortgage insurance, but I don’t see how it makes buying a home any more accessible,” Independent Mortgage Planners managing director Craig Morgan said.

“I don’t think [the Government] is going to turn around and say ‘we’re guaranteeing the 15 per cent, so loosen your standards’.

“The lender is still lending at 95 per cent, therefore it’s going to tighten its standards, as it absolutely should.”

This appears to be in line with what Mr Morrison himself has said, stating lenders would still “do all the normal checks on the borrowers to make sure they can meet their repayments”.

“This isn’t free money.”

Will this make it easier to buy a house?

It’s unclear. Some analysts and economists have argued it will simply encourage young home buyers to take on more risk and increase their debt.

Others say it has the potential to drive up housing prices even more, which are beginning to come down in Melbourne and Sydney.

Mr Morgan believes the policy has “less inflationary risk than just handing out money to first home buyers”.

“Largely anything that has ever made buying a first home more accessible has tended to have inflationary pressures on home prices, particularly in that section of the market available to first-home buyers,” he said.

“But this is just a genuine saving of cost.”

But he suggests it is not correct to say this policy will make it possible for a whole heap of first-home buyers to buy a home when they couldn’t right now.

“The notion this is going to make credit more available, I’m really struggling with that,” he said.

Real Estate Institute NSW chief executive Tim McKibbin has told the ABC it would also depend on “how the banks are going to treat it”.

“Somebody who achieves 5 per cent and then has a government subsidy to achieve the rest of it, how the banks will treat that as a risk profile we’re yet to see,” he said.

Topics:

federal-election,

business-economics-and-finance,

housing-industry,

government-and-politics,

australia

First posted

May 13, 2019 12:24:35