18 Jul The insurance you pay for someone else – Andrew Mirams
You’ve probably heard the term, LMI – lenders mortgage insurance. What is it? What’s behind it? Is it necessary? Is there a way not to have to pay it? Andrew Mirams gives us the lowdown.
Kevin: You’ve probably heard the term, LMI – lenders mortgage insurance. What is it? What’s behind it? Is it necessary? Is there a way not to have to pay it? Let’s find out. Andrew Mirams from Intuitive Finance is here to explain what it’s all about.
Lenders mortgage insurance: is it a curse or a benefit?
Andrew: Kevin, it’s not a curse at all; it’s a requirement for many borrowers to just get into the market in the modern day. When we’re talking about housing affordability, it’s probably not a housing affordability crisis that we’ve been in; it’s actually the ability for people to save that deposit to get in.
So, what is LMI or lenders mortgage insurance? It’s basically the difference… In Australia, all our lenders want you to have 20% deposit plus cover your stamp duties and costs and things like that. So, on a standard $500,000 purchase, you should have $100,000 plus your stamp duties and costs. You might have $125,000 to 130,000 to get in.
As it’s becoming dearer to live and everything like that, and we’ve had a pretty low amount of wages growth, it’s getting harder and harder to save that deposit. So, you can then lend up to 90% and 95% to buy your home, and it just requires an insurance there, which actually protects the lender should you ever default down the track.
It’s not an insurance that protects you; I think it’s about the only insurance in the world that you pay and it protects someone else. So, it’s there to cover the buffer, the margin.
Kevin: On that point, that’s probably one of the biggest gripes. How do they get away with that? Why aren’t the banks having to meet that themselves?
Andrew: Well, I guess the banks could just say no in reality. The reason they want that 20% margin there is they know that the markets go up and down at different times, and if there’s ever a reason that they might have to force sale a property, they want a margin in there that they know they’re going to be able to recoup their funds.
The one thing we know about our Australian banks is that they don’t lose money. So, that’s why they don’t do it, and the mortgage insurers are a separate arm to the lenders.
Kevin: Okay. What is the cost of it?
Andrew: That depends. There’s a whole range of factors there. It will depend on the loan amount and how high. There are certain tiers up: to $300,000, over $750,000. There’s a whole range of different tiers. The more exposed you are just from a dollar perspective, the more expensive it will be.
If you’re only putting in a 5% deposit – so the bank is giving you a 95% loan – and the risk is higher, they’re more at risk because there’s less margin, so you will pay more for LMI on that situation. If you’re putting in 15% deposit and your loan is 85%, then you’ll find that your mortgage insurance will be a lot lower.
So, there’s not an actual cost that I can quote you, Kevin, because there are a whole lot of specifics in terms of your actual loan-to-value ratio, the loan amount, and then there’s some analysis around the client as well that happens.
Kevin: Of course, if you want to avoid it altogether, you just have to cough up a 20% deposit. Has that 20% barrier ever moved? Was it ever less or more?
Andrew: No, not in my time, and I’ve been lending for around about 30 years. It’s always been around that 20%. Like I said, it covers the lenders for those margins when property may go up and go down. It would be naïve to think that properties don’t fluctuate like shares and other things in the market; there are cycles. So, it’s just there to give them a comfort or a buffer.
Kevin: I do know that with some other types of borrowing – for instance, in a super fund – sometimes you’re required to come up with an even bigger deposit. Is that also geared to LMI, or is it also just because it’s a super scheme?
Andrew: No, in super, you wouldn’t be able to get lenders mortgage insurance because that’s actually governed by the SIS Act and the superannuation. They’re very stringent in their rules on superannuation.
Kevin: Okay, there it is. LMI all explained for you. A necessary evil but probably a good one. It does protect you in the long run, but it also protects the bank. Andrew Mirams, thank you very much for your time. Andrew Mirams of course from Intuitive Finance.
Andrew: My pleasure, Kevin. Thank you.