{"id":8207,"date":"2016-06-06T10:00:46","date_gmt":"2016-06-06T00:00:46","guid":{"rendered":"http:\/\/realestatetalk.com.au\/?p=8207"},"modified":"2016-06-06T10:00:46","modified_gmt":"2016-06-06T00:00:46","slug":"what-is-lmi-all-about","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/what-is-lmi-all-about\/","title":{"rendered":"What is LMI all about?"},"content":{"rendered":"

Andrew Mirams<\/strong> from Intuitive Finance explains what LMI or Lenders Mortgage Insurance is all about.
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\nTranscripts<\/strong>
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\nKevin:<\/b>\u00a0 I was approached by a young couple recently who were very concerned about getting into their first property and, I guess like a lot of young people, have been trying to save but they can\u2019t get a full 20% deposit and were very concerned about the LMI \u2013 lenders mortgage insurance \u2013 and asked me what it was all about. I thought I\u2019d get more detailed insight into LMI. Joining me, Andrew Mirams from Intuitive Finance, a regular contributor to our podcast.
\nAndrew, what is LMI? What is lenders mortgage insurance?
\nAndrew:<\/b>\u00a0 Hi, Kevin. A great question. I think there\u2019s still a little bit of a mish out in the markets about what it is. Firstly, lenders mortgage insurance is these companies that sit around the banks. The banks want everyone to have a 20% deposit plus their fee, so they\u2019ll lend you 80%. They\u2019ll put that on their own books and that 20% is basically their buffer for any market movement.
\nCan you go over that? If you have a smaller deposit, you can do that, but then we have a group of mortgage insurers that actually insure the debt. They actually then do their own assessment on whether you\u2019re a good risk and they insure the debt. What that means is it\u2019s the only insurance in the world, I guess, that you pay to insure someone else. What the lenders mortgage insurance is doing is actually securing the bank\u2019s position in case of default.
\nKevin:<\/b>\u00a0 It\u2019s hardly fair, is it?
\nAndrew:<\/b>\u00a0 Well, I think if you don\u2019t have it, you don\u2019t get into your property, so I think it\u2019s actually a necessary evil in our markets, \u00a0because for the young people of today, it\u2019s not so much the holding costs with rates being at all-time record lows; it\u2019s actually their ability to save a deposit and get into the market. That\u2019s becoming the harder thing. So I think mortgage insurance has a definite opportunity within the market to use. We have both homebuyers and investors using it all the time.
\nKevin:<\/b>\u00a0 Give me an idea on the costs involved in LMI.
\nAndrew:<\/b>\u00a0 There\u2019s not a set formula because there are a number of insurers; they all have different premiums. Generally, what they do is it depends on your actual loan-to-value ratio. What the loan-to-value ratio means is if you have your loan at $400,000 and your property is worth $500,000, that\u2019s the 80% LVR is what we call the acronym. If you can only do your loan at $450,000 against your property at $500,000, that\u2019s then your 90% LVR.
\nNow, the premiums go up in 2% increments so whether you borrow 82%, 84%, 86%, 88%, etc. in increments. For an investor, it\u2019s kept at 90% nowadays, and for owner-occupiers, they\u2019re still able to go up to 95%.
\nIt\u2019s basically your risk and reward. The more you can contribute to your property, the lower the mortgage insurance will be because their risk is actually lower. There is not actually a set formula or premium that you can just say that\u2019s the amount, but that\u2019s how that\u2019s roughly calculated. There are also a couple of tiers in your loan amount. Under $500,000 and over $500,000 tend to attract different premiums, as well.
\nKevin:<\/b> \u00a0Does the premium have to be paid in a lump sum, or can it be part of the loan?
\nAndrew:<\/b>\u00a0 There are two parts to that question. It\u2019s a one-time lump-sum payment, but most of the time, you can actually capitalize it onto your loan, so it\u2019s not actually an on-cost, like your stamp duty that you need to be able to fund up at the start. You can add it and capitalize it on top of your loan.
\nKevin:<\/b>\u00a0 Are there any mortgages where LMI wouldn\u2019t apply, as in, say, a reverse mortgage?
\nAndrew:<\/b>\u00a0 Yes, there are in those circumstances. There are also certain high-income-earning professions that lenders will waive their right to mortgage insurance because they\u2019re trying to attract a certain profession; they know that they\u2019re higher income and things like that. Yes, there are opportunities. There are some lenders that will do an 85%. Again, it\u2019s a bit of a give-and-take relationship. You might not pay the mortgage insurance but you\u2019ll pay a little bit more in interest rates. No free ride, Kevin.
\nKevin:<\/b>\u00a0 No. We learn that in life very quickly. What about off the plan, Andrew? Does it apply there?
\nAndrew:<\/b>\u00a0 You can get it for off the plan. Off the plan is a really interesting market because as we know, when a developer is actually building something, they have their margins built in because they\u2019ve paid someone else to market and, then there are commissions and fees. It\u2019s not uncommon\u2026 It doesn\u2019t happen all of the time. There are really good projects out there and the market might have been kind where the purchase price will marry up to the actual valuation at the time. It\u2019s not uncommon for valuations to come in a little bit less or lower than what the actual client has purchased.
\nThen you can take mortgage insurance out against generally the lower of the two \u2013 or most of the time now. Because they\u2019re greater than a 12-month purchase, the valuation will be what the lender uses and then you\u2019ll sign a mortgage insurance premium based on the valuation.
\nKevin:<\/b>\u00a0 I imagine it might have happened in Sydney where people purchased a property and maybe it went up in value. They were paying lenders mortgage insurance then they wanted to borrow against the increased equity. Do you need to adjust that insurance?
\nAndrew:<\/b>\u00a0 Yes. Once you have the insurance premium in place, you can actually do what we call a top-up. What the lender does is if you, let\u2019s say, paid the $5000 in your first application and then you want to take out a little bit more equity, you\u2019ll only pay the difference. The premium for the new loan and the new loan amount might have been 5\u00bd; you\u2019ll actually only pay that $500 in the differential being the top-up mortgage insurance. It\u2019s a really good strategy we use for our investors to keep that insurance in place, and if I\u2019ve used it at 90% from the start, we\u2019ll try to keep that policy in place and take it back up to 90% again and just pay a top-up premium. It\u2019s a really great strategy for our investors.
\nKevin:<\/b>\u00a0 Would a way to avoid paying LMI be to get some kind of a family guarantee?
\nAndrew:<\/b>\u00a0 Absolutely. For first-home buyers, that\u2019s a great opportunity. Like we said from the outset, it\u2019s getting harder and harder for our young people today to save that required deposit, so using a family guarantee \u2013 which is where the parents use the equity out of their property to assist a young person getting both a home or an investment; it might be a great way for them to start adding investing, as well \u2013 they can put their property up and that way, they\u2019ll avoid the insurance.
\nKevin:<\/b>\u00a0 If I\u2019m not backed for finance on a property purchase because I don\u2019t qualify for LMI, can I find out why?
\nAndrew:<\/b>\u00a0 It\u2019s generally the same reasons as what you would get for a lender. The answer is yes; however, because the insurers are taking on a greater risk, it\u2019s their calculators and their reasoning and rationale around whether they\u2019ll accept the property in the first place. So that\u2019s where some of those off-the-plan properties, they might have a certain exposure already to that development or they might be postcodes they don\u2019t want to lend to.
\nThen if clients are actually stretching themselves a little bit but it works at the bank, it still doesn\u2019t mean it\u2019s a guarantee to work at the mortgage insurer because they have stricter and tighter policies around, because again, they\u2019re insuring the lender and they\u2019re going to be at risk if a client was to not make their payments. The lender basically knocks on the insurer\u2019s door and says, \u201cThank you, we need those funds back,\u201d and then it\u2019s up to the insurer to pursue the client.
\nKevin:<\/b>\u00a0 Always good talking to you. Andrew Mirams from Intuitive Finance. Andrew, thanks for that insight into lenders mortgage insurance. I appreciate your time.
\nAndrew:<\/b>\u00a0 My pleasure, Kevin. Thank you.<\/p>\n","protected":false},"excerpt":{"rendered":"

Andrew Mirams from Intuitive Finance explains what LMI or Lenders Mortgage Insurance is all about.   Transcripts   Kevin:\u00a0 I was approached by a young couple recently who were very concerned about getting into their first property and, I guess like a lot of young…<\/p>\n","protected":false},"author":176692471,"featured_media":8208,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[34,11,13,36,22],"tags":[101],"class_list":["post-8207","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance-topic","category-kevin-update","category-latest-story","category-property-investment-topic","category-research-topic","tag-podcast"],"yoast_head":"\nWhat is LMI all about? 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