Why lenders mortgage insurance should be transferable
Something’s been bothering me lately – lender’s mortgage insurance, and what it’s costing young Aussie homebuyers.
Lender’s mortgage insurance is a premium borrowers pay when they have less than a 20% deposit and it’s designed to protect the lender from default. But it seems like a lot of borrowers don’t quite understand what LMI is and what impact it will have on their home loan if they decide to refinance.
Here are the facts about lender’s mortgage insurance and why I think it needs to be made transferable.
LMI can be a good thing
LMI can be really useful for certain buyers. For example, it’s great for young buyers trying to break into the market because it allows them to buy a property before they have a 20% deposit.
It can be hard for borrowers to save up a deposit in a market like the current one.
With the market the way it has been lately, by the time you save your deposit, property prices might have risen by another 20-30% and then you’re back at square one. LMI gives potential home buyers the chance to break into this uber competitive market.
When LMI becomes a problem
The main problem with LMI is that it isn’t transferable – which means if you want to refinance your home loan for a better deal with a different lender and your LVR is still over 80%, you’ll probably have to fork over the premium all over again.
So why is that such a big deal? Well, 14% of mortgages are operating with LMI. That’s $52 billion in home loans each year. And it’s a cost that usually hits the most vulnerable buyers – young people just starting out in the market.
If these people try to refinance their home loan, they often find that any money they’d save by getting a better deal goes to paying the insurance premium again. For example, a borrower refinancing their home loan and borrowing 90% of a property valued at $800,000 might pay $19,512 for LMI. If they’re refinancing from a 30 year home loan with an interest rate of 4.10% to one with a 3.38% rate, that’s equal to over six months of repayments.
It effectively squashes the benefit of refinancing and traps people with one lender. That limits the competitiveness of the home loan market, which is bad news for everyone.
What can be done
At the moment, one option open to borrowers who do decide to refinance is to ask for a refund of their LMI premium. But there are numerous problems with this system, starting with the fact that it’s up to the discretion of the lender whether they agree to give a refund at all, and even if they do it usually isn’t much. Often you can get up to 40% back in the first year of your mortgage, and then 20-30% back in the second year, but after that you can pretty much forget it.
Another big problem is that it’s up to the borrower to ask for the refund – if you forget, or if you don’t know it’s an option, the bank isn’t going to remind you.
So the refund is worth asking about – something is better than nothing – but it’s not enough to protect young homebuyers. It really should be made mandatory for everyone, not just left to some borrowers who understand the system better than others.
What I’d really like to see happen, is for lender’s mortgage insurance to be legislated similarly to stamp duty, so that it’s payable only once and allows free movement between lenders.
Tips and tricks to avoid double-paying for LMI
For owner occupiers:
- Save as big a deposit as possible. The whole point of paying for LMI is that saving up a 20% deposit isn’t always possible. But the more you save initially, the lower your LMI premium will be and the closer you’ll be to not having to pay the premium again if you refinance down the track.
- Pay down your loan amount before switching. The real problem with LMI is having to pay it twice when you refinance a home loan. So, to avoid that, try to pay enough off your loan amount that when you switch to a new lender your LVR is less than 80%.
- Ask your parents to be guarantor. If your parents own their own home, another way to avoid paying for LMI is to ask them to act as guarantors on your mortgage. That way, you can add the equity in their home to your deposit and lower your LVR.
- Invest with a partner. Whether it’s a close friend, sibling, or spouse, go in with someone else to buy the property. That way you’ll each only have to save half of the deposit.
- Think about your profession. It’s a little known fact that some professions allow for you to borrow with a higher LVR without buying lender’s mortgage insurance. If you’re a solicitor, accountant, or a doctor, for example, talk to your new lender, because you may be able to avoid paying for LMI, even with a deposit of just 10%.