Mortgage Insurance
Mortgage Insurance is an insurance policy that covers the lender for the amount of the loan given to you. It is paid by the borrower, usually as a once off premium, to cover the lender against the risks of the borrower defaulting on your loan. In other words, if you default on your loan, any amount unrecoverable from you, or your property is guaranteed to be paid to the banks from the Insurance Company. For example, You purchase a property in 2003 for $400,000 borrowing $380,000(95%). You have not paid your loan for 6 months as you have lost your job and you still owe $370,000. The bank is forced to sell your property. The house is sold for $360,000 with selling fees of $10,000, leaving $350,000 to pay off the outstanding loan balance. The loan still has $20,000 to be paid. The bank will get paid $20,000 from the insurance company. It is important to realize that this policy is for the lenders protection, not yours. It does not dissolve you of the responsibility of the incurred debt. This means that if a claim is made by a lender the Insurance Company will take action to recover these amounts from you. Mortgage Insurance can be referred by many names such as: 1) Mortgage Guarantee Insurance (MGI) 2) Lenders Mortgage Insurance (LMI) 3) Primary Mortgage Insurance (PMI) 4) Mortgage Insurance Do not be confused as they are all essentially the same product. Although there are hundreds of different mortgage products and Financial Institutions there are only a handful of different of Insurance Companies offering Mortgage Insurance to the industry. When a borrower is requesting to borrow more than 80% of a property most lenders demand mortgage insurance to be paid. The higher the % you are borrowing the higher the premium. Some lenders will insure all loans regardless of how much you are borrowing. When less than 80%, however, this costs are usually paid by the lender. The insurers usually charge less mortgage insurance for smaller properties, meaning for a relatively low purchase price they will charge a lower premium. Insurers are often only prepared lend investors up to 90% of the property valuation. This is based on the theory that an owner occupier is less likely to let the bank foreclose if the value of the property should fall dramatically or they get into severe financial problems. Borrowing more than 80% not only increases your Borrowing Expenses it also means there is another party involved in determining whether you will approved for the loan; becuase the insurer is taking on the risk they want to make sure that you have the capacity to pay the loan. It is not unusual for a bank to approve the loan subject to the mortgage insurer’s approval(in principal) only for the Insurance Company to reject the application. They can have more inflexible lending criteria.
For example You apply for a mortgage. The bank gives ‘in principal’ approval for the loan. When the insurer looks at the application they scrutinize the application in more detail. They reject the loan as they consider your work history unstable and are unwilling to take on the risk. It is impossible to give you an accurate amount of how much Mortgage Insurance you will be required to pay. The premiums vary greatly between insurers and the type of loan involved. We have included below a table of premiums charged by one particular insurer in Australia.
Loan <$300,000 GST Total >$300,000 GST Premium usually paid by lender 0% 0.08% 0.008% 0.10% 0.14% 0.014% 66.01% 0.11% 0.011% 0.13% 0.22% 0.022% 75.01% 0.16% 0.016% 0.19% 0.22% 0.022% 76.01% 0.22% 0.022% 0.27% 0.28% 0.028% 77.01% 0.22% 0.022% 0.27% 0.28% 0.028% 78.01% 0.32% 0.032% 0.39% 0.42% 0.042% 79.01% 0.32% 0.032% 0.39% 0.42% 0.042% Premium usually paid by borrower 80.01% 0.43% 0.043% 0.52% 0.57% 0.057% 81.01% 0.43% 0.043% 0.52% 0.57% 0.057% 82.01% 0.59% 0.059% 0.71% 0.85% 0.085% 83.01% 0.65% 0.065% 0.79% 0.85% 0.085% 84.01% 0.76% 0.076% 0.92% 1.07% 0.107% 85.01% 0.81% 0.081% 0.98% 1.07% 0.107% 86.01% 0.92% 0.092% 1.11% 1.27% 0.127% 87.01% 0.97% 0.097% 1.17% 1.27% 0.127% 88.01% 1.08% 0.108% 1.31% 1.50% 0.150% 89.01% 1.13% 0.113% 1.37% 1.50% 0.150% 90.01% 1.30% 0.130% 1.57% NA NA 91.01% 1.35% 0.135% 1.63% NA NA 92.01% 1.51% 0.151% 1.83% NA NA 93.01% 1.57% 0.157% 1.90% NA NA 94.01% 1.73% 0.173% 2.09% NA NA * Total is Total Premium including GST and Stamp Duty (NSW) Total 0.17% 0.27% 0.27% 0.34% 0.34% 0.51% 0.51% 0.69% 0.69% 1.03% 1.03% 1.29% 1.29% 1.54% 1.54% 1.82% 1.82% NA NA NA NA NA
Please note this information is indicative. You should not rely on it to make financial decisions as the lenders mortgage insurance payable on your own property may differ from this chart. Note: This discussion and the calculations above are general and indicative. You should ensure that any specific figures on which you choose to rely have been checked with regard to your specific circumstances. This cannot be done definitively except by proceeding with a full loan application.