Newspaper article The Observer (Gladstone, Australia)

What You Need to Know about Lenders Mortgage Insurance

Newspaper article The Observer (Gladstone, Australia)

What You Need to Know about Lenders Mortgage Insurance

Article excerpt

Byline: Andrew Crossley

WHETHER you refinance, apply for a loan increase or purchase a property there are many considerations to bear in mind, one of the most important things to consider is whether you need to pay LMI. Most lenders will mortgage insure their loans above 80% LVR (loan to value ratio) if it is a full documentation loan, and over 60% LVR if it is a low documentation loan (i.e. self-employed people who have not completed their tax returns.)

LMI is for the lenders protection, (but is paid by the client in the event that the client defaults on the loan). It is a one off premium, which can be capitalised (added) to the loan. This is not a mortgage protection fee for the client.

Loan Mortgage Insurers will credit score; this is a software program, which analyses the loan application applying weighted scores to various parts of the application to the creditworthiness of the applicant. It could mean the application is declined before a credit assessor has the chance to review the application. If it fails credit scoring no amount of negotiation or rational discussion will be entered into. There are some lenders who charge a risk fee instead of LMI, this fee will normally work out similar to LMI in dollar terms but with no credit scoring.

The more someone borrows, the higher the interest repayments, which in turn will eat into cash flow. LMI forms part of the cost base of the property, it means the property will have to increase more in value to compensate for this LMI cost if it is capitalised (added) to the loan.

LMI can be very high, and will become higher as the dollar amount and LVR increase.

Example: 350,000 at 85% LVR = $4,600

500,000 at 95% LVR = $21,000

LMI providers won't allow more than 1 million above 80% LVR, at 95% the loan would be limited to around 650,000. This is 'per application' basis, however, the applicant's exposure can be up to 2.5 million across several applications and therefore several properties, with more than one insurer, the aggregate amount of debt can be even higher, spreading one's exposure across the insurers. …

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