Lenders mortgage insurance is a one-off fee
that is there to protect the bank in case you go into default.
Nathan, do you know there’s a recent study by ABC where over 40% of people thought lenders
mortgage insurance was there to protect them? Yeah, it’s crazy, the amount of people that do
get confused at the lenders mortgage insurance covers the bank and not yourself.
So one thing to remember is a one-off premium. It gets charged at the start of the loan and covers
you for as long as you’re with that lender. So it’s non-transferable between
one lender and the next. So let’s take a bit of a stop there.
So why do you need lenders mortgage insurance in the first place?
Why is it there? The first reason is generally, because the banks
believe there’s an inherent risk when lending over 80% of the property value.
Now in some circumstances, we can lend higher for some professions
without mortgage insurance. By and large, once you’re lending over 80% of
the property value, the banks will enforce an insurance, which is mandatory.
It’s a one-off premium, gets charged at the start of the loan. In other words, if you have a lower deposit,
the banks think you’re a bit higher risk because they’re putting more of their money in
and less of your money in, so they get insurance taken out on you in case something
goes wrong with the loan. So Nathan, what are the benefits of
lenders mortgage insurance? Why pay for that premium? Firstly, it’s an opportunity cost.
So think about what if you had to save up that 20% deposit, how much longer is it
going to take you? If it’s going to take you another 18 months,
that same property you’re looking at today, might increase in value.
So it gets you in the market today. It gets you off, if you’re paying rent,
the rental market. So in sense, you might actually work out in
that the same paying the mortgage insurance, whereas paying someone
else’s rent you’re still behind. So firstly, it’s an opportunity cost.
It gets in the market sooner. It also lets you leverage the bank’s money further.
So you’re not using as much as your own deposit in syncing towards the purchase,
which if you’re investing elsewhere or you’ve got other uses for the money,
it might make sense. And we’re going to be like ABC,
so we’re going to balance the books. So you know, there’s downside
to mortgage insurance. So it costs money but it also changes
between different lenders, doesn’t it? Yeah, so not all banks charge
the same mortgages insurance premium. So it is important that you search and look around
and make sure you compare the costs from mortgage insurance to mortgage insurance
within each bank because between one and another, there can be thousands
of dollars difference. Yeah, that’s right and we’ve got a case study
recently where there was a borrower buying $600,000 property at 10% deposit
and between your Bank A to Bank G, you know, a range from five different banks,
still a $6000 difference in the lenders mortgage insurance premium.
It was crazy, so definitely look at that. And Nathan, I guess just wrapping it up,
how can you avoid lenders mortgage insurance? What can you do?
You know, just a couple of quick tips. First is put down 20% deposit to avoid it.
That’s the most basic one. Another is if you’re in a specific category
of occupation and it ranges from medical to lawyers to accountants, you can go up to 90%
with some criteria being met that you can get the insurance waive so there’s a few —
There’s some crazy ones. There’s sports people and TV entertainers. Anyway, your job could be on the list.
Hit us up so you can find out. It’s definitely worth looking at but again,
I agree Nathan, I think lenders mortgage insurance is a good tool to help you get into
the property market really quickly. I used it on my first and second home
and third, actually. I have to get in there because it can really-
it can take years to save that extra deposit and lenders mortgage insurance
lets you get in now. So if you got any questions on this, hit us up.
Let us know at HunterGalloway.com.au or leave some comments below.