It is important that borrowers are aware that lenders mortgage insurance does not provide any protection to them. Lender’s Mortgage Insurance insures the lender, not the borrower. LMI insures the lender for any short fall on a home loan, so if you were sold up because of defaults, it covers the difference between what your property is sold for and the amount still owing. If a mortgage insurance provider declines to issue the insurance for a loan, the lender will not proceed with the application.
If you have a 100% home loan you will almost certainly pay lender’s mortgage insurance. Most Low Document Loans and Non Conforming Loans require LMI when you have a deposit of less than 40%. Gnerally, your lender chooses your LMI provider. Mortgage insurance is arranged by the lender, not the borrower, although the borrower pays for it. Most banks & lenders have their preferred mortgage insurance provider. You would typically like to choose one over the other to suit your borrowing situation. It is very important to discuss this decision with your mortgage broker.
On fully verified 100% loans, dependent on the lender and the risk, mortgage insurance can cost up to 3% of the amount you are borrowing. Up to 95% loans, the amount would typically be up to 1.2% – 1.5% of the loan amount. As you get closer to 80% home loans, the cost usually discounts substantially. If you have 20% or more deposit and all other factors are in line, mortgage insurance is generally not charged.
Borrowers need to be aware that lender’s mortgage insurance attracts a stamp duty tax which varies among states and territories and is dependent on the location of the security property. Where a loan is bundled with two or more properties located in different states, the premium is apportioned to the relevant state on a security value basis. The stamp duty is then be calculated on the premium apportioned to each state at the rate applicable.
About the author
Max is a Mortgage Broker who has specialized in no deposit home loans for over 5 years.