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As expected, the RBA left rates on hold during their meeting earlier in the week, however RBA Governor Michele Bullock said the central bank continues to keep its options open in regard to the need for interest rates to rise further over coming months. I like to think this statement is a scare tactic, a passive way of trying to stop us from rushing out and spending again, however the lingering thorn in the side of the RBA at present centres the combined impact of slowing productivity and increasing wages.
With news yesterday that the refurbishment cost on the RBA headquarters in Sydney had blown out to $850 million, three times the original estimate, it got me wondering how they are financing that project and whether they too are feeling the pinch of high interest rates on any associated debt.
In this week’s newsletter, we take a look at Lenders Mortgage Insurance.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is a type of insurance that protects lenders in the event that a borrower defaults on their mortgage payments and the proceeds from the sale of the property are not enough to cover the outstanding loan balance.
This insurance is typically required by lenders when a borrower’s deposit is less than 20% of the property’s purchase price.
Pros of Lenders Mortgage Insurance
- Allows borrowers to obtain a mortgage with a smaller deposit, often as low as 5%.
- Increases accessibility to the property market for first-time buyers or those with limited savings.
- Can enable borrowers to purchase a property sooner, without having to wait until they have saved a larger deposit.
- Protects lenders from financial losses in case of default, potentially leading to more lenient lending criteria or lower interest rates for borrowers.
Cons of Lenders Mortgage Insurance
- Adds an additional cost to the mortgage, typically paid as a one-time upfront premium or added to the loan amount.
- Increases the overall cost of borrowing, as borrowers are required to pay insurance premiums on top of their mortgage repayments.
- Does not provide any direct benefit to the borrower; it solely protects the lender’s interests.
- The cost of LMI can be significant, particularly for borrowers with smaller deposits, potentially thousands of dollars.
- If property values decline, borrowers with a high LVR (loan-to-value ratio) may find themselves in negative equity, owing more on the mortgage than the property is worth, exacerbating the risk of default.
How is Lenders Mortgage Insurance calculated?
LMI is calculated as a percentage of the loan amount and will vary depending on the equity the borrower will have in the property as well as the amount being borrowed.
Also impacting the amount payable for LMI are the type of loan, the lender and the provider of LMI. Other factors can include
- Whether your property is owner occupied or not – it is believed that you are less likely to default on a loan if the property is also your residence.
- If you are self employed or paid as a PAYG employee.
- Whether or not you have genuine savings.
- Whether or not you are applying for the First Home Owner Grant (FHOG).
Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
