Lender’s Mortgage Insurance: Why, What & How?

– Lenders Mortgage Insurance
or LMI, what is it, why is it important and
how can you avoid it? That’s the questions
that I got coming through from Jack on the Infinite
Wealth YouTube channel. Now, note, if you haven’t checked out our YouTube channel,
get along and subscribe. Make sure you see all of
our videos as they come out. So, Jack wanted to know
more about lenders mortgage insurance and it’s exactly
what we’re going to be covering off in our Just Ask
Tim video series today. Now before we get into it guys, let me introduce myself. My name is Tim Guest. I’m Australia’s leading financial educator and the managing director
of Infinite Wealth. I’ve trained over 18,000
people how to reach their financial goals
whether it be things like home ownership, travel and
lifestyle or early retirement. We do it using only what
people currently have available to them right now and we do it with very high
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videos through social media platforms so that your friends and family can get the benefit of this
valuable information as well but let’s get stuck into it. Lenders mortgage insurance, so what is it? Essentially lenders mortgage
insurance is an insurance policy that the bank takes
out against you as a risk, as a borrower I mean, as a risk, okay? It only covers the bank however, you’ve got to pay the premium. Now this is one of the things that a lot of people often miss. A lot of people think that
lenders mortgage insurance actually protects them. That’s often referred to as
mortgage protection insurance as in a very different kinds of insurance. So, lenders mortgage insurance
essentially was invented to allow banks to provide lower deposit home loans to borrowers. So this is typically only
provided if you’re not putting in a deposit of 20% or more, so maybe it’s a 15%
deposit, 10% or 5% deposit, and in the case that you’re
getting into a home loan with a lower deposit like that, the bank will normally
insist that lenders mortgage insurance is taken out. Now one of the things
that you can do with it, you can either pay this fee upfront or what can you do is actually, most banks will allow you to
add it onto the loan amount and then you pay it off
during the loan term. Now what affects the cost of this lenders mortgage insurance? Well, a couple of things
that affect the cost, primarily what it is is the loan amount and the amount of deposit
that you’re looking at. There might be some other factors that come into play as well, like it might be whether
you’re full-time or casual or maybe whether you’re an employee or whether you’re self employed. That might have a little bit of an impact on the lenders mortgage insurance as well but primarily, loan amount and deposit. To give you a bit of an idea of what you might be looking at, if we looked at a $500,000 purchase, so if utilised, there’s two
lenders mortgage insurance providers in Australia, QBE and Genworth. I’ve done this based on
Genworth’s calculator. So if you’re putting in a 5% deposit for a home loan purchase of $500,000, the lenders mortgage insurance is going to be about $16,000. If you double that deposit to 10%, pretty much the lenders
mortgage insurance halves, so it’s actually about $8,500 and you go to 15% deposit,
it will half again, almost half again to $4,500. Now, how can you go about avoiding it? Well the first thing you could do is this, is you could actually
save a larger deposit and I’m going to come
back and talk about that, get your 20% deposit and that way you probably don’t have to worry too much about lenders mortgage insurance. The other thing you might be able to do and what is becoming a
certainly more popular option nowadays is you might
have a family member, like mum or dad or
something along those lines, that might be able to go guarantor. Now one of the biggest
mistakes people normally make when it comes to guarantor is they think that if you’re a guarantor, you’re guaranteeing the
loan, that’s not the case. Normally what you’re only guaranteeing is actually the deposit. Normally what you
guarantee is a 20% deposit by guaranteeing the 20% deposit, what it does is it avoids
you from having to pay that lenders mortgage insurance, and of course you can save that cost. The other way that you
might be able to avoid it, so that we’ve got the proposed first home loan deposit scheme okay? So this is something that was proposed by the coalition government
in the last election, it’s scheduled to come into
play January 1st in 2020. There’s a few details still
being finalised about it but do keep in mind that
you’ve got to be under the $125,000 income mark
and it’s only available to 10,000, the first 10,000
borrowers every single year. Considering last year
there was about 110,000 first home owners, it’s only going to be a
very small percentage. So the question that often
people are then left with is what do I do? Do I continue saving,
save a bigger deposit and save the cost of the
lenders mortgage insurance or am I better off getting
into the market now with a smaller deposit
and copping that cost? So here’s primarily how
you want to think about it. Now I’m going to take the
worst case scenario here so let’s take the $500,000 purchase, let’s take the $16,000
cost for the lenders mortgage insurance, so
that works out to be about 3% of the purchase price of the property. So, typically we’re helping
clients that are investors or looking to produce a return or growth out of investing in property. So if you’re an investor looking
to get into a growth area, chances are that areas going to provide better than a 3% per annum growth. Hence you’d actually be better off spending the money on the
lenders mortgage insurance and getting into the market
now, with a lower deposit. If you are potentially looking
at maybe owner occupied, you’re not so much
worried about the growth and there’s no market that’s
really growing or moving, similar, a little bit
similar to what’s happening in a lot of markets right
now around Australia, you may be better trying to
save up that larger deposit and limit the lenders mortgage insurance. But keep in mind, you’ve
got to keep an eye on the market because if
the market starts to move, there’s not going to be
much growth that’s required in that house to actually
have it been better off that you got into the market sooner. So that’s the best way to think about it if you compare getting in now
and using lenders mortgage insurance or saving the bigger deposit. The other thing you’ve got to consider is if you are going to save a 20% deposit, you know if we’re talking $500,000 house, that’s a hundred grand, okay? So you know, 5% is 25
grand, 20% a hundred grand, that means you’ve got to save $75,000. So it’s probably going to
take you a number of years to do that and what
you’ve got to consider, is what’s going to happen
to the price of property over those numbers of years. So that’s the way to think about it, guys. So guys, that pretty
much covers everything that I wanted to run through with you for lenders mortgage insurance today. A couple of things before I go. Once again, we love
seeing your interaction with these posts so
please comment, question, like, love, angry. If you’ve got a question
that you want me to discuss in more detail or you want me to answer as part of our Just Ask Tim video series, please make sure you put that question maybe in the comment box below or you can contact us through
any of our social media platforms, either me
personally @timguestau or if you want to contact Infinite Wealth, @infinitewealthau, you’ll
be able to get in contact with us through there. Now also don’t forget,
please share these videos with your friends and family
so they can get the benefit of this valuable information as well and of course also stay
tuned for Friday this week when I, or Thursday actually,
when The Week In Real Estate, where you can get all the top stories happening from the week in real estate, financing investment so you
can stay ahead of the pack. Okay guys, that’s it from me. Have a great week, enjoy the
sunshine that’s out there today and I look forward to speaking
to you later in the week. See you, guys.

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