Mortgage insurance (MI), known as Lenders Mortgage Insurance (LMI) in Australia, protects banks and lenders in the event of a borrower defaulting on their loan.
It exists in most mortgage industries around the world, often under different names. Regulations and lending policies that define the conditions for mortgage insurance also differ.
It is generally required when the percentage value of the property being borrowed is equal to, or above, a certain amount.
If you are looking at purchasing Australian real estate and would like to know more, listed below are the main costs and conditions of mortgage insurance in Australia, the US, the UK and Canada.
Names for LMI in each country
- Australia: Lenders Mortgage Insurance (LMI).
- UK: Mortgage Indemnity Guarantee (MIG) or Mortgage indemnity insurance.
- USA: Private Mortgage Insurance (PMI). It is less common, but it can also be called LMI.
- Canada: Mortgage Default Insurance (MDI). Also referred to as CMHC after the Canada Mortgage and Housing Corporation.
When is mortgage insurance required?
Mortgage insurance conditions often change depending upon which country is involved.
In Australia almost all loans that are over 80% loan to value ratio (80% LVR) require LMI. For low doc loans, LMI is required when over 60% LVR is borrowed.
This means a borrower paying less than a 20% deposit (down payment), or a 40% deposit respectively, is required to pay LMI.
Follow the link to find out more about Australian lenders mortgage insurance.
The loan to value ratio (known as LTV in the UK) depends upon the lenders. It can vary from approximately 75% LTV, to 90% LTV for lower risk loans. Any loan amount over these values is known as a high loan-to-value advance.
Lenders can choose to cover their risk in ways other than a mortgage indemnity guarantee (MIG). In this situation, the charge may be labelled an ‘additional security fee’, or a ‘high lending fee’, amongst other things.
If you have your deposit, or can prove you have saved money over a period of time (determined by the bank), the lender may waive MIG. However if you do not have a deposit, it is unlikely you will avoid the cost.
Private mortgage insurance is similar to LMI in Australia. If a loan is over 80% of the property value, it will be required.
Once the borrower owns 20% of the equity of their property; that is, the principle is reduced to 80% LTV, PMI is often no longer needed. However, until a loan reaches 78% LTV, a lender has no obligation to cancel PMI payments.
If a borrower has been deemed high risk, they can retain the insurance payments until they are only owed 50% of the original purchase price.
Instead of charging a separate sum, some lenders will increase the interest rate of the mortgage. In this situation they will pay the insurance themselves. In fact, ‘No MI Required’ loans often involve lender-paid PMI and higher corresponding rates.
For a mortgage where the down payment is under 20% LTV, or where the loan equals at least 80% of the purchase price, Mortgage Default Insurance (MDI), or CMHC insurance, is required on a mortgage with an amortization of 25 years or less.
For loans over $1 million CMHC insurance is not needed. Since July 2012 a minimum 20% down is required on properties at this price and above.
In Canada, the main mortgage insurer is the Canada Mortgage and Housing Corporation (CMHC).
If you have an Australian property in mind and you would like to know more about your LMI payment, you can talk to us. We work with my different banks and lenders and can find the best Australian mortgages, at the most competitive rates.
Call 1300 889 743, or enquire online and one of our brokers will contact you.
How much does mortgage insurance cost?
Lenders Mortgage Insurance For Australia
|0%-10%||LMI must be paid upfront (some lenders will allow you to capitalise this cost).
LMI is 0.7%-1.5% of loan amount.
|10%-20%||LMI can be added to loan amount.
LMI is under 1% of loan amount.
|20% +||No LMI fee.|
|0%-40% (for Low Doc Loans)||Required, however, costs can vary.|
|60% + (for Low Doc Loans)||Usually no LMI fee.|
In the UK, the cost is generally determined by the insurance provider your lender has chosen. Using the following information they then determine the premium payable.
- The amount of the mortgage loan.
- The cost or value of the property, whichever is lower.
- The loan to value ratio at which no mortgage indemnity is required.
A Mortgage Indemnity Guarantee (MIG) can be as little as £100, and well over £1000. In general, for a loan of £100,000, a borrower will pay approximately £1,500. Depending upon your situation, your lender may lower this cost for you.
Some lenders will let you add the cost of the insurance to your mortgage. Be aware you will need to pay interest on this if you do.
If a borrower defaults on their loan, they are still liable for the debt. This is different to countries such as the US. The insurer, not the lender, gains the right of ‘subrogation’. They can reclaim any money that you have not yet repaid to your lender.
If the insurance does not cover the full value of the loan, both the insurer and the lender are able to pursue a borrower on default.
In the US the cost structure changes fairly significantly depending upon the lending guidelines of the bank you are using. However there are broad PMI costing consistencies throughout the US mortgage industry.
Typically, for a $100,000 mortgage, rates will be approximately $55 per month. As real estate purchase prices rise, this can increase dramatically, sometimes upwards of $1000 per year on loans over $200,000 LTV.
In Canada, Mortgage Default Insurance (MDI) will cost between 1.75% and 2.75% of the total mortgage amount.
This applies for any loan where the down payment is below 20% LTV and the amortization period is 25 years or less. The percentage MDI required is relative to size of the down payment; the larger the payment, the lower the insurance amount.
- 5% – 9.99% requires a down payment (deposit) of 2.75% of the property purchase price
- 10% – 14.99% requires 2.00%
- 15% – 19.99% requires 1.75%
- 20% and above requires 0%
These prices are an approximation and can be subject to change. In some circumstances, the cost of MDI may drop to 1% for low risk borrowers with a down payment of close to 20%
More information on LMI and Australian mortgages
Having read the information above, you now know the major differences in terminology, as well as bank regulation and guidelines, including under what conditions mortgage insurance is required.
The major worldwide provider of mortgage insurance is called Genworth. They operate in over 25 countries, and have insured over $300 billion worth of home loans in Australia alone.
In Australia, LMI can be paid as part of your mortgage repayments. In this situation, the cost is usually deducted from the overall value of the property you can borrow.
For example: On a $200,000 loan where you are borrowing 80% LVR, you will only receive 78% LVR for the property, if LMI is set at 2% of the property value.
If the bank considers you a low risk, high value customer, they may add the 2% to the amount you borrow, lending you 82% LVR overall.
Contact us for more information, and apply today!
Here at the Home Loan Experts, our brokers specialise in all forms of mortgages that require LMI. We work with over 40 different banks and lenders, providing home loans for citizens, permanent residents, temporary residents, and non-residents from all over the world.
For more information and to apply for a loan, contact us today! You can enquire online and we will contact you, or call us on 1300 889 743.