HOME LOANS EXPLAINED
Lenders Mortgage Insurance
When buying or refinancing a home or investment property, you might be required to pay Lenders Mortgage Insurance.
Lenders Mortgage Insurance is insurance for the lender to protect their position should you default on your loan repayments. It is important to note that Lenders Mortgage Insurance protects the lender, not the purchaser.
You may be required to purchase Lenders Mortgage Insurance if you have less than 20% deposit. The higher ratio you need to borrow, the higher the risk and as such, the higher your Lenders Mortgage Insurance fee tends to be.
Lenders Mortgage Insurance is a one-time fee charged at the initial draw down of your loan. The premium can vary from bank-to-bank and is based on the amount you are borrowing. Lenders Mortgage Insurance is smaller when you borrow just above 80%, and it increases substantially as your loan percentage gets higher.
Every lender has unique rates. Below, we will look at a case study for the same property with different Lenders Mortgage Insurance scenarios.
Case Study
Emma is purchasing a new home in QLD, with a contract price of $500,000. For the purpose of this case study, we assume the valuation has come in on contract price.
Property Details
- Purchase price: $500,000
- State: QLD
- Type: Primary place of residence
Stamp Duty & Transfer Fees
Each state has a different Stamp Duty fee schedule, this case study is based on QLD rates.
Total: $10,328.00
Scenario 1
Emma has saved $100,000 to use as a deposit for her loan. However, Emma will need to pay her Stamp Duty and Mortgage Transfer Fees.
The amount she has to contribute to her purchase is:
- $100,0000 in savings minus $10,328 in Stamp Duty fees = $88,672
The loan amount will be contract price of $500,000 minus deposit of $88,672 = $410,328.
Although Emma had saved 20% of the contract price, she needs to pay Stamp Duty fees. This increases the amount Emma will be borrowing.
Emma is now borrowing more then 20% of the property value, she will need to pay Lenders Mortgage Insurance. Lenders Mortgage Insurance on this amount will be approximately $3,733.98 (this is a guide only and will vary based on lender).
The Lenders Mortgage Insurance will be added to the amount borrowed.
Total Loan Amount: $414,061.98
Scenario 2
Emma has saved $75,000 to use towards her property purchase. Minus the Stamp Duty fee of $10,328, her deposit to contribute to her property purchase is $64,672.
This means her loan-to-value ratio is 87%. Meaning Emma must borrow 87% of the purchase price and she needs to purchase Lenders Mortgage Insurance.
The Lenders Mortgage Insurance payable is approximately $5,919.24.
Scenario 3
Emma has saved $50,000 to use towards her property purchase. Her stamp duty and transfer fees will need to be drawn from her deposit. in this scenario her Lenders Mortgage Insurance payable is approximately $15,328.
In this final scenario with the much higher Lenders Mortgage Insurance fee, Emma will need to borrow $475,657 to cover Stamp Duty, Lenders Mortgage Insurance and the balance of the purchase.
As you can see, as the loan ratio increases, the LMI also increases considerably. Purchasing a property is a big financial decision, and it is important to have a full understanding of all fees and costs involved before purchasing a property.
This case study is a simple illustration of how LMI is applied. It does not consider factors such as serviceability, that is the ability to repay the loan which is also a factor in your loan approval.
Everyone’s circumstances are different, so it is important to understand fees, costs and loan structure options for your circumstances. Our team can walk you through all aspects of purchasing a property to help you make an informed purchasing decision.
Disclaimer:
Terms are subject to approved persons only. This information is true and correct as of 25/11/2021. All of the content above is general in nature and may not suit your personal needs, situation objective & goals.
