Why do banks charge LMI?
Lenders Mortgage Insurance (LMI) creates a safety net for the lenders in case you cannot repay your loan and the lender makes a loss.
This insurance allows banks to approve loans which in the past would have been declined due to being considered too risky!
Unfortunately, they pass the bill for the LMI premium on to you, the borrower, as a once off payment when your loan is advanced.
In most cases, the premium can be “capitalised” or added on top of the amount that you are borrowing.
What is a "safe" loan for the banks?
If you are borrowing between 60% and 80% LVR then it is considered to be unsafe or high risk for the lender. In this case the lender will obtain mortgage insurance and ask you to pay a premium.
Borrowing more than 80% LVR for a low doc loan is considered to be extremely risky and is only available from specialist lenders.
Avoid LMI by borrowing less than 60% LVR
If you reduce your loan size then most lenders will not charge you an LMI premium. This is very simple, however not everybody has the funds to reduce their loan size.
Provide limited income evidence
Some of our lenders can accept alternative forms of income evidence which you may be able to provide. For example we can accept:
- Interim financial statements and BAS for the last 12 months for a loan of up to 70% LVR.
- Two year old tax returns for a loan up to 95% LVR.
- An old tax return and BAS for a loan of up to 90% LVR.
LMI or risk fee?
Some lenders effectively self-insure their loans by charging a risk fee instead of obtaining LMI. This means there is no external mortgage insurer, however you still have to pay them a fee similar to LMI anyway.
Not all low doc loans have the same LMI premium rates. The same can be said for risk fees which can vary wildly between lenders and go by a variety of names.
You should contact a good mortgage broker to find out which one (whether LMI or a risk fee) is cheaper for your low doc home loan.
Get the lender to pay your LMI for you!
The LMI premium does not always come as a once off fee after your loan is settled. Some lenders will pay the fee for you and in turn, increase your rate to compensate. What you should do is calculate the length of period for your loan and then work out whether it is cheaper to have a higher rate or a once off fee.
Many borrowers prefer to have a higher rate so that they do not have to pay the extra fee when buying a property which would reduce the amount that they have as a deposit.
Three tips when applying for a loan with no LMI
Check for discounts
Some lenders offer special promotions from time to time where they will pay your LMI premium. Currently, one of our lenders is promoting an offer where they will pay the borrower’s LMI premium if the LVR is at or below 70%.
Carefully choose your loan amount
Lenders calculate the LMI premium in percentile brackets. This means that the rate used to calculate the premium will be different from percentage to percentage.
For example, having a LVR of 70% as opposed to 70.01% can easily reduce premium by several thousand dollars depending upon your loan amount.
By choosing the right lender and loan amount you can potentially save a substantial amount off your LMI premium.
Consider other options
A major difference is that they often require more income verification than Low Doc Loans but do not require as much evidence as Full Doc Loans. They are priced as full doc loans with no LMI if you borrow less than 80% LVR.
Apply for a low doc loan with no LMI today!
Our mortgage brokers know which Lenders Mortgage Insurers are the cheapest. Some lenders offer special LMI in an attempt to gain additional market share. Most often these LMI specials are not advertised to the public.
Enquire online or call us on 1300 889 743 to discuss your situation with one of our mortgage brokers.