It’s common knowledge that purchasing property in Australia is expensive. First you have to save up the initial home deposit. Which will set you back around $65,000 if you are purchasing the average priced residential property in Australia at $656,800, with a 10% deposit.
On top of that there’s the cost of stamp duty and building inspection, conveyancer and home loan application fees. While the majority of these property buying charges are paid upfront, there is another cost that could end up hitting your hip pocket twice if you want to refinance down the track – lenders mortgage insurance.
What is lenders mortgage insurance?
When you purchase a property and have a loan to value ratio over 80% (e.g a deposit under 20%), the home loan provider will require you to pay lenders mortgage insurance. This is an insurance policy that will cover the bank financially if you default on the loan.
While paying lenders mortgage insurance can help younger buyers get in the market earlier, without having to save up a 20% deposit – which can take a significant amount of time – it can end up trapping borrowers with an uncompetitive loan, as LMI isn’t transferrable.
The lenders mortgage insurance trap:
How LMI currently works in Australia is if you want to refinance to a lender with a more competitive rate, but haven’t paid off more than 80% of the property’s value, you’ll be up for the cost of paying lenders mortgage insurance again.
That means that the LMI premium originally paid to your current lender will be effectively money down the drain if you refinance. This puts borrowers in a situation where it may be better to wait it out until they own more than 80% of the property’s value, as the cost of LMI may outweigh the savings made by switching.
When you consider that once you refinance, the lender no longer needs the protection of lenders mortgage insurance on your loan, making LMI transferrable really should be made mandatory. However the problem is, at the moment there’s no set policy that will force your bank to refund the premium you’ve paid for your LMI insurance.
Not only does this affect young borrowers, however also works against the banks as borrowers who would otherwise switch lenders to take advantage of better deals in the market are trapped in their loans until either their property grows in value or they pay off more of their loan. In the future I’d like to see lenders mortgage insurance become like stamp duty, where it is one fee paid once upfront and can be transferred between lenders.
How to avoid paying LMI again
While there’s not much you can do about lenders mortgage insurance not being transferrable, there are a few things that will help you avoid this trap:
- Ask for a partial refund. You know the saying “it doesn’t hurt to ask”. If you’re refinancing early in your home loan term, the bank may be more likely to give you a partial refund on your LMI premium. For instance, if it’s the first year of your mortgage, you could potentially get 40% back and between 20-30% in the second year. However, I should mention it gets harder and harder as time goes on.
- Adding value to your home by giving your property a refresh, can increase the equity in your home and push you under the 80% loan to value ratio, so you won’t have to pay LMI again. Plus if you’re an investor it can make for stronger rental returns, so it’s a win win situation.
- Make extra repayments on your loan. Of course, the easiest way to ensure you don’t pay lenders mortgage insurance again is by pumping extra into your loan when you can, like when you receive a bumper tax return or promotion at work.
Steve is Mozo’s property investment and lending expert. With an extensive knowledge of home loan products and property trends, Steve is full of practical tips to help first homebuyers, refinancers or investors build and get the most out of their property portfolio.