Lenders Mortgage Insurance is an insurance policy that pays the difference between the sale price of a property and the outstanding loan owed to a bank in the event of a forced sale.
For example, for a property sold at Mortgagee Auction for $340,000 with outstanding loan of $362,000, the claim amount is $22,000.
Who does it cover?
The policy covers the Bank only. Bank collects $340,000 at Auction and $22,000 from the Mortgage insurer. The Insurer then takes action to recover $22,000 directly from the borrower.
Who pays the premium?
The borrower. It is paid once only at the start of the loan. It can be paid from borrower’s own savings or if lender allows, it can be added to the loan.
When do I need to have it?
It is at the banks discretion, but usually always applies if the loan is more than 80% of the security value.
How much does it cost?
Premiums can range from $500 to $50,000 or more. The premium is percentage based and this benchmark increases with risk and amount. For Example:
A $350,000 loan at 82% is approx. $2,300 but a $350,000 loan at 95% is approx. $12,000. A $750,000 loan at 82% is approx. $6,900 but a $750,000 loan at 95% is approx. $35,000
Can I add the premium to my loan?
Yes, but most banks won’t if you are already borrowing 95% of the security value before adding the premium. There are some lenders that allow it.
Can you show me an example?
|95% Max||100% Max|
|Base Loan Amount (95%)||$350,000||$350,000|
|Amount actually borrowed||$350,000||$362,000|
|Funds available from loan||$338,000||$350,000|
Do I get a refund if I refinance?
No, you will have to pay the full amount again regardless of how long you have been with the previous lender. If you refinance with the same lender, you only pay the difference between any new premium and what you’ve already paid.
Is the Mortgage Insurer separate to the bank?
Most banks use either of the 2 main mortgage insurers in Australia, QBE and Genworth. Some banks self-insure, which means they take on the risk themselves but still collect the mortgage insurance premium.
Can the Mortgage Insurer decline my loan if the Bank approves it?
Yes, but it is rare. If it does happen, it is most likely due to an issue with the security, such as its location.
How can I avoid it?
Have a 20% deposit or find a guarantor who can offer extra security. Some occupations like doctors, engineers etc sometimes only have to pay when the loan is greater than 90%.
What should I do if I have more questions?
Speak to a professional mortgage broker. If your question is not answered here then it is likely you need to discuss the question with an expert.