Despite the continued rise in the number of lenders’ mortgage insurance (LMI) policies being taken out, an overwhelming majority of Australian home buyers remain in the dark about the true purpose of this type of coverage, a recent survey conducted by Digital Financial Analytics (DFA) found.
Data gathered by the research and consulting firm from about 52,000 households indicates a huge knowledge gap among first home buyers, with almost 55% of respondents believing LMI protects them and roughly 26% admitting they are unsure of what the policy does.
And although the figures drop to 35% and 31%, respectively, among existing mortgage holders, the firm says the numbers still represent an “alarmingly high” level of misunderstanding about the coverage type.
So, this begs the question…
LMI is a lump-sum insurance product that home buyers are required to pay when taking out a mortgage with less than a 20% deposit – meaning the amount they are borrowing is more than 80% of the property’s value.
While the mortgage holder pays for this type of coverage, it does not protect them. Instead, LMI covers the mortgage lender against financial losses if the borrower defaults on their loan and the property sells for less than the amount owed.
Based on DFA’s survey results, many home buyers confuse LMI with mortgage protection insurance, which is an entirely different product that protects borrowers in case of loan default due to death, sickness, disability, or unemployment.
The true purpose of LMI is to protect and potentially benefit the lender, according to financial comparison website Canstar. It adds that by reducing the lender’s risk, this type of policy allows banks and other financial institutions to lend larger amounts and approve more home loan applications.
Lenders’ mortgage insurance can be paid upfront or incorporated into the home loan. If the LMI amount is added to the loan, borrowers are generally charged interest, along with the rest of the loan. LMI premiums are also non-refundable, meaning mortgage holders will not be able to transfer their policy to another lender if they switch to another lender in the future. Depending on their situation, borrowers may have to take out another LMI policy through their current lender.
Another thing homebuyers need to know about lenders’ mortgage insurance is that the lenders arrange the policy on their behalf. Borrowers often do not have a choice on the matter. The two largest providers of LMI policies in Australia are Genworth Financial and QBE, according to consumer finance website Savings.com.au.
Each insurer calculates LMI premiums slightly differently. The cost depends on a range of factors, including the size of the loan, deposit amount, loan type, and borrower’s employment status.
Most financial comparison websites have their own LMI estimator that borrowers can access to help with the calculation.
To get an idea of how much LMI premiums are worth, Insurance Business tried out Genworth Financial’s LMI fee estimator. The prices listed in the table below are for first home buyers of owner-occupied housing, borrowing with a loan term of up to 30 years and excluding stamp duty. The values are updated as of January 18, 2022.
|
Property value |
5% deposit |
10% deposit |
15% deposit |
|
$300,000 |
$7,090.67 |
$4,100.93 |
$2,186.05 |
|
$400,000 |
$11,897.45 |
$6,943.91 |
$3,770.13 |
|
$500,000 |
$14,871.82 |
$8,679.89 |
$4,712.67 |
|
$600,000 |
$23,954.25 |
$13,284 |
$6,463.09 |
|
$700,000 |
$27,946.62 |
$15,498 |
$7,540.27 |
|
$800,000 |
$31,939 |
$17,712 |
$8,617.45 |
Source: Genworth Financial
Despite the cost, taking out LMI can yield certain benefits depending on the borrower’s circumstances. According to Savings.com.au, LMI can be worth paying if the borrower does not have the time to save up a 20% deposit.
“In a property market where prices are rising quicker than you can save, or if there’s a rare, limited-time opportunity for you to snap up your dream house at a good price, getting in faster and paying the extra fee can be a better deal,” the consumer website explained.
Meanwhile, the Insurance Council of Australia (ICA) describes LMI as “an important component of Australia’s housing market.”
“[It enables] more Australians to achieve the dream of home ownership, or enabling them to achieve this goal earlier, by reducing the credit risk of the lender providing the home loan,” the council told ABC News.
Some financial comparison websites also offer aspiring homeowners advice on how to avoid paying for LMI.
If saving for a 20% deposit is not possible, Canstar suggests that home buyers be on the lookout for lenders offering discounts or waiving LMI costs entirely. Having a family member act as a guarantor and applying for state-sponsored grants such as the First Home Loan Deposit Scheme are also good options, it adds.
Some borrowers can also be exempt from paying LMI just by working in a “highly regarded” profession, according to Savings.com.au. This includes medical and legal professionals, accountants, mining specialists, entertainment industry professionals, and professional athletes as they are deemed “low-risk” borrowers because of the “high-demand and well-paying” nature of their work.
