Quite often people get confused when they hear the term “Mortgage Insurance”. Some think it’s the insurance you can pay to cover your mortgage payments if you get sick, injured or lose your job. The truth is it covers the lender not the borrower.
Mortgage Insurance covers the bank for any shortfall in the event they have to sell the property to recover their costs if non-payment or if you default on a loan.
“Remember – Mortgage Insurance covers the bank, however they pass the premium charged to you – the borrower”.
Mortgage Insurance generally applies when you have less than a 20% deposit – which for most home buyers is the case, especially 1st home buyers. Generally speaking, the smaller the deposit you have, the bigger the Lenders Mortgage Insurance (LMI) premium the bank will need to pay – passing this onto the borrower.
It is important to note the following;
- This insurance fee varies from lender to lender
- Some lenders will let you borrow this insurance and add it to your loan
- Lenders have different rules that they apply to decide if they can lend to you
- The smaller the deposit – the bigger the premium
- Loan size does matter, higher premiums apply if you are borrowing over $300K and $500K respectively
Let’s take a look at this scenario –
Bob & Heather are buying their first home. They have saved $35,000 and wish to buy a property for $320,000. They will use 5% ($16,000) for their deposit and the balance for stamp duty, legal fees and moving.
They want to borrow the rest from the bank – 95% ($304,000).
However as Mortgage Masters clients, their broker has suggested increasing their contribution and bringing the loan amount to under $300,000 ($299,900). So instead of borrowing 95%, they are now at 93.72% – this would REDUCE the LMI premium saving them $3,165 in the LMI fee plus a lower monthly repayment if it was added to their mortgage repayments.
Let’s not forget that a lower loan amount = lower weekly repayments too!
The other interesting point is that LMI Premiums and rates will vary from lender to lender – even when they are using the same supplier for their LMI cover.
This is another good reason to use our NO COST service – not only can we compare hundreds of products and interest rates but also LMI fees, as these are the ones we would all like to forget about!
Mortgage Masters are expert mortgage brokers in Newcastle, Maitland and Hunter Valley. Get the best mortgage advice by contacting us today!