Finance advice
Adam Grocke

What is mortgage insurance?

By Adam Grocke

Mortgage insurance isn't something to be scared of, but it is something you need to understand in order to make sound purchase decisions.

Blogger: Adam Grocke, business development manager, Johnston Grocke 

Lender mortgage insurance, often referred to as LMI, is an insurance taken out by the lender to protect them against the borrower defaulting on their loan.

It is a one-off payment, paid by the borrower, when the loan is first taken out if the loan is above 80 per cent of the value of the house: e.g. if the house was worth $400,000 then an 80 per cent lend would be a $320,000 loan.

Anything above 80 per cent is considered a higher risk for the bank to lend against as there is less hurt money (equity) in the property if the borrower were to default.

As the loan to value ratio (LVR) gets higher (80 per cent to 95 per cent) the cost of the mortgage insurance premium increases as the risk increases. As a rule of thumb, the cost doubles from 80 per cent to 85 per cent, then doubles again to 90 per cent and again to 95 per cent.

95 per cent is the maximum you can borrow against a house and the mortgage insurance cost can be over $10,000. It’s uncommon for first home buyers to avoid mortgage insurance all together, but it’s not a bad thing.

The following scenario shows that a borrower may be better off purchasing a house now with a smaller deposit and pay LMI, instead of saving a higher deposit to reduce the LMI cost.

John Smith wants to purchase his first home for $400,000. He has saved a $10,000 deposit over the last four years and is happy to use his $40,000 in full to purchase a house. Assuming house prices are increasing at five per cent per year, if John purchased today and paid approx $15,000 in LMI, his house would be worth $20,000 more in a year’s time. This means John has made back his LMI cost in the first year.

Let’s now look at John’s second option, to wait another two years to save an extra $20,000 giving him $60,000 deposit for his house. Again, assuming house prices rose by five per cent per year, this would mean John has $60,000 to purchase the same house that is now worth $441,000. John's LMI cost now is approx $12,000. Only a small saving in LMI for all the effort of saving a further $20,000 over two years and the bigger issue is John missed out on the increase in the house price of $41,000.

If you understand that it allows you to get into the property market with less money, mortgage insurance is not something to be scared of.

Read more:

3 big risks to your positively geared strategy 

EXCLUSIVE: The 6 week property transformation - episode 5

7 steps to building a massive property portfolio: Part 7

Is a renovate-and-flip project right for you? 

6 ways to maximise your investment's sale price

 

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About the Blogger

Adam Grocke

Adam Grocke

As leader of the Mortgage and Finance Services division, investment property consultant and business development manager for the firm, Adam excels at juggling his time, especially when one considers his significant football commitment with Woodville West Torrens where he has won 2 premierships and played in excess of 200 SANFL games.

His passion for helping clients find the best finance solutions, and buy their next home or investment property is only matched by his passion for surfing and living out of his campervan by the beach.

Finalist Australia's top 30 Brokers under 30 in 2013, Winner of the prestigious 2011 SA/NT business of the year, 2011year on year business growth, Platinum achiever 2010-2014, Rookie of the Year Award 2008/09

FROM THE WEB

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In this episode of the Smart Property Investment Show, Dominique Grubisa joins host Phil Tarrant to share her personal story which saw her hit rock bottom with excessive debt during the GFC.

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Dominique unpacks how, by relying on her background in law, she was able to overcome that debt and in doing so develop a unique investment strategy which she believes many can utilise today.

Dominique discusses distressed properties, and how she goes about finding them in order to buy property well below market value. She shares the process of identifying distressed properties as well as the controversy surrounding this buying method.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

3 big property investment myths busted open
5 steps to take on low-risk property developments
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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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To hear more about these services, make sure to tune into this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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    In this episode of Property Showcase, Michael Beresford joins editor of Wealth James Mitchell to unpack why recent political changes are not reason for concern for Australian investors.<\/p>\r\n

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Many investors who would have been successfully approved for finance last year are struggling now to either begin or continue their property investment journey because of the current financial climate.

In this episode of the Smart Property Investment Show, broker John Manciamelli and Momentum Media director Alex Whitlock joins host Tim Neary to discuss how APRA changes and the royal commission have resulted in a tighter lending economy and what that means for Australian investors.

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If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

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Lessons from a falling market
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AREAS MENTIONED:

Hobart
Bondi
Deception Bay

 

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Getting finance approved in this tightening lending environment

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