There are some banks that will approve your home loan even if you don’t have good credit or a large deposit or all the required documents. They often charge a risk fee, which is an alternative to Lenders Mortgage Insurance (LMI). It allows buyers that don’t qualify for LMI to get approved for a home loan.
What Is A Risk Fee?
It is a one-off and non-refundable fee. Instead of paying LMI, a lender charges a risk fee. The lender approves your loan internally and it does not need to be processed by an LMI provider.
You can either pay the risk fee upfront or capitalise the amount into your mortgage.
There are different names for risk fees:
- Mortgage risk fee
- Low Deposit Premium (LDP)
- Reduce Equity Fee (REF)
- Equalisation Fee
Low Deposit Premium
CBA’s risk fee is called the Low Deposit Premium. It is available on the bank’s low-deposit home loans and is calculated based on the size of your deposit and how much you borrow. The higher your deposit, the lower the fee charged.
When Is A Risk Fee Charged?
It is charged under the following situations:
- When you are applying for a low-doc loan; however, some banks charge a risk fee for full-doc loans as well.
- When you are applying for a low deposit home loan
- When you are applying for a bad-credit home loan
If the bank charges a risk fee, you do not pay LMI. Lenders charge risk fees based on loan size and Loan-To-Value Ratio (LVR); the amount differs from bank to bank. Risk fees increase when LVR increases.
Who Offers Risk Fees?
There are several banks, non-banks and specialist lenders that offer risk fees:
- They offered by major lenders and prime non-bank lenders are cheaper than LMI premiums.
- Non-bank specialist lenders offer these fees for borrowers that major banks turn down. These lenders provide another chance for borrowers to get approved for a home loan.
What Are The Advantages Of Risk Fees?
- The amount you pay for the risk fee is usually less than an LMI premium.
- You do not need to pay any insurance taxes because a the fee is not insurance cover.
- Lenders sometimes charge a risk fee instead of LMI, to be able to approve the borrower for a mortgage.
What Are The Disadvantages Of Risk Fees?
- Most products with these fees come with higher interest rates.
- The fees protect the bank, not the borrower.
- Most banks use LMI providers instead of charging risk fees. So your options are limited.
Risk Fee Vs LMI — Which Is Better?
LMI is applicable only when you are borrowing more than 80% of the property value; however, a risk fee is paid under various circumstances, not just for low deposit home loans.
Ultimately, the decision to pay either a risk fee or LMI depends on the lender and the type of home loan you are seeking. The key point is that mortgage insurers and lenders that charge risk fees all use different pricing. So for certain loan amounts and LVRs, risk fees might be cheaper than LMI or vice versa.
At Home Loan Experts, our mortgage brokers use software to compare the costs of LMI as part of the loan recommendation process. The best approach is to calculate the total cost of the loan, including LMI, interest rates and other applicable fees over the term the borrower intends to keep the loan.
Call us on 1300 889 743 or enquire online to find out if risk fees would be cheaper than LMI when you apply for a home loan.