Understanding lenders mortgage insurance

LMI: the good the bad and the ugly.

Using lenders mortgage insurance (LMI) is one way to buy a property without having the 20% deposit which is typically required by most lenders.

Read in this article

The Good

With LMI, lenders can offer finance at a higher proportion of the purchase price, allowing prospective buyers to purchase a property with a smaller deposit than would otherwise be required.

When do you pay it?

The LMI premium is a one-off, non-refundable fee that is paid at loan settlement.

• For most lenders, the LMI fee can be included in the loan amount and is not counted in the loan serviceability calculations.
• If a borrower refinances their loan, the premium is not transferable.
• If LMI is required on the new loan, a new LMI premium must be paid.

If LMI is being used for an investment property mortgage, it can be considered a tax-deductible expense like a bank fee.

The Bad

LMI only protects the lender in case the borrower defaults on their mortgage repayments.

You need to make doubly sure you understand LMI does not protect you the borrower in any way.

When you use a mortgage and LMI to help purchase property with a smaller deposit, remember lenders are dealing with you on a commercial basis.

This means:

• They will have their own insurance (LMI) in place to protect themselves and their shareholders.
• They will expect you have considered your own needs and whether to use life insurance and income protection to protect you and your family (and any guarantor you may have to your loan).

It pays to shop around

Each LMI provider has a different set of requirements and usually a different pricing model too. This means it pays to shop around especially if you need a speciality lender because your purchase situation is, well, complicated.

If you’re buying multiple investment properties, you also need to be aware each LMI provider will have a cap on how much exposure they’re prepared to have to any one person. If you’re buying multiple properties, it mightn’t be long until you’re forced to use multiple LMI providers for additional loans or use a 20% deposit for each subsequence property purchase to avoid the need for LMI.

It's a good problem to have I’m sure.

Are there alternatives to using LMI?

Some funders recognising the LMI restrictions are now self-insuring and as part of their loan approval will simply charge you a risk fee, depending upon how complicated your purchase and employment situation may be.

The Ugly

If life doesn’t go according to plan and you find yourself unable to make your repayments for more than 90 days, (perhaps you suffered a workplace injury or a car accident etc.) you can expect the property used as security for the loan will be repossessed and sold off in an attempt to repay the loan.

• This legal forfeiture process is called mortgagee-in-possession and is where the funder subsequently takes possession of the security property to sell and recover the mortgage debt.

If the proceeds of the sale don’t cover the outstanding loan balance, the funder will then make an insurance claim to the LMI provider to recover the shortfall. The LMI provider may then try and recover their debts from the borrower (or any guarantor), for any shortfall amount.

The million dollar question?

Is it better to pay LMI or wait until you have a bigger deposit?

The answer will depend upon what you want to do and when you want to do it?

• In a fast-moving market where property prices are rising faster than your ability to save a bigger deposit, using LMI might be a helpful way to get into the property market quicker.
• During slow moving markets or where your ability to save a larger deposit is strong, LMI may be less of a consideration.
• Alternatively, if additional security properties are available, increasing the available security equity may achieve a similar result.

What’s best for you will depend upon a careful and thorough consideration of your personal situation and your very individual needs. This is where a financial adviser like Sapience Financial and Investment can be a useful resource to help you make more informed decisions.

Is your Credit History LMI friendly?

Pro Tip:

New Comprehensive Credit Reporting laws begin in July 2018.

Previously, a person's credit history only held negative information about their credit file, such as missed payments of more than 60 days, and bankruptcies.

Under the new system, there's much more information available to the lender about a persons personal credit behaviour, including

• monthly payment histories on loans and credit cards,
• whether they were paid on time, and
• red flags on any late payments of more than 14 days on bills and utility payments

This means negative credit history information can be used to set higher interest rates for borrowers with late payment history and lower rates for those with cleaner credit behaviours.

What can you do to become LMI friendly?

With the new Comprehensive Credit Reporting system and the opportunity LMI can provide a borrower, it’s now more important than ever to find out exactly where you’re sitting financially, to make sure your credit history doesn’t contain mistakes and increase the risk you’ll be denied credit.

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.