Lenders Mortgage Insurance – Who Does It Protect?

By Dave Fleming : 24 November, 2017

According to figures provided by the Australian Prudential Regulatory Authority (APRA) Australian borrowers in the first half of 2016 have been forced to pay almost $500,000,000 (1/2 billion dollars) on approximately 100,000 lenders mortgage insurance (LMI) policies.

One of the inherent issues with the scheme is quite a few borrowers don’t fully understand it. Many think they are the ones being protected if they default on their loan when they sign up for these expensive policies.

Although some of these polices can cost upwards of $40,000 on top of the borrowers mortgage they in fact protect the bank, not the borrower in the event of the borrowers defaulting on the loan.

What is Lenders Mortgage Insurance?

www-mastermortgagebrokersydney-com-au-what-is-lmiLenders Mortgage Insurance (LMI) safeguards the mortgage lender in cases where a home loan borrower defaults on their mortgage loan. The insurance coverage is only necessary for mortgage loans that have a balance that exceeds 80% of the property’s value at the time of application.

Historically, home mortgages were only granted up to and including a maximum of 80% of the loan to value ratio. This resulted in borrowers needing to pay an initial deposit for at least 20% of the purchase price whenever they {|were interested in buying} a house using a mortgage. That was undertaken simply because the smaller loan to value ratio led to a lower risk mortgage loan to the loan provider. In the event of a default, the lending company could claim back then sell the home quickly in a fire sale at a discounted price to recoup their funds.

Yet as the years have passed by, a number of loan providers have made it possible for individuals to borrow in excess of 80% of the home’s value. To cancel out the associated risk, loan providers now acquire insurance cover on the total amount of the loan that goes above 80% of the property’s value. This way, if the home loan gets into default, the mortgage lender will be able to recoup a portion of the debt of the mortgage loan from the insurance provider.

What do Borrowers Know?

Martin North, an independent banking analyst who operates a rolling survey of banking customers recently said that “Around Seventy per cent of homeowners believed that LMI protected them versus the lender.”

“So it is not totally crystal clear to the householder that this actually protects the bank rather than the borrower and personally I think that there needs to be a whole lot better disclosure in regard to this LMI product set.”

How Much is LMI

The premium fees for lenders mortgage insurance can vary widely based on your loan to value ratio and how much you want to borrow. Once the loan you want exceeds 80% of the value of the property you want to purchase LMI kicks in. You may want to try this calculator to see what your LMI fee will be.

For info on best interest rates go here

What Happens in the Event of a Foreclosure?

www-mastermortgagebrokersydney-com-au-foreclosureIf the borrower defaults and the bank forecloses, but the sale of the property does not cover the value of the mortgage, then the bank can make a claim under the terms of the majority of lenders mortgage insurance policies.

Peter White, president of the Finance Brokers Association of Australia said; “The insurer pays the bank, so the bank gets out scot-free,”

“But what that loss was — [the insurers] then chase the borrower to recoup their losses. That could be $100,000.”

The Details Are ‘buried in the terms and conditions’ When It Comes To Lenders Mortgage Insurance

“Borrowers were made aware of the risks of lenders mortgage insurance.” In a recent statement, put out by the Australian Bankers Association.

“LMI would typically be discussed with customers when they initially apply for a loan, be included as part of information packs, and discussed again at the final stage when the customer proceeds to purchase,” the statement said.

“The terms and conditions of LMI are included in the loan contract.”

Peter White from the Finance Brokers Association of Australia said, “Intervention is required by the Federal Government to intervene to improve disclosure to ensure borrowers fully understand how lenders mortgage insurance works and what their obligations are.

The policies he said were “buried in the terms and conditions”.

“Make it a regulated document that every banker and every broker must give to the client and the client needs to understand,” he said.

“And if it’s introduced at the beginning of the process it maximises the opportunity of understanding.”

Bio:
About About Dave Fleming

Dave is enthusiastic and fascinated by the digital and social media worlds. He is passionate and enjoys entrepreneurial pursuits, wealth creation financial strategies, health, fitness as well as cooking. Dave is the webmaster at www.mastermortgagebrokersydney.com.au, which is an information website pertaining to loans. He has a deep commitment towards writing about and helping people understand the basics of how the financial world works.

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