So, lets’ say you want to buy a property but you don’t have the minimum 20% deposit required. You’re likely going to pay lenders mortgage insurance, but what exactly is lenders mortgage insurance and is it worth the cost?
A lot of people want to know more about lenders mortgage insurance because often, banks, lenders and sometimes mortgage brokers don’t really explain what lenders mortgage insurance is or they don’t take enough time to explain it. In this article, you’ll be able to get a further understanding of lenders mortgage insurance to fully understand what it is, why it could benefit you, whether or not it’s worth paying for, what exactly does it cover and why you would want to get it.
Some people believe that it’s meant to cover you personally as the borrower of the loan, but it’s actually not. It’s for the lender to protect them if they’re taking an increased risk by offering you a loan.
What exactly is an increased risk? Well, for most properties such as residential properties, banks want to see at least a 20% deposit in which case they won’t insist you have lender’s mortgage insurance. They like to see a 20% deposit because, if for some reason that you default on your loan, and they need to sell the property, they’re quite confident that they’re going to get at least 80% of the value you paid for the property back when they sell the property to cover their loan.
However, if you’re only borrowing 5% of the property’s value, then they’ll be a lot less confident that if you default on the loan, they’re going to get 95% of the value of the property back. It’s a higher risk loan for lenders and in order to cover this higher risk, they charge an insurance fee.
Obviously, a lot of people would take out this insurance. Not everyone would need it and that’s the way insurance works. So, the lenders would charge you a one-time fee as this insurance would cover them against those few circumstances where people do default on the loan when they have more trouble selling the property and getting enough value back.
It goes to protect the lender because they’re taking increased risk on you to get the loan. This sounds like that it’s not very beneficial to you, right? It’s a fee that you have to pay, which is generally added on to a loan so your loan will be bigger. But you still have to pay it and it protects them. So what’s the benefit to you as a borrower? The benefits of lenders mortgage insurance are that if you don’t have the full deposit, then you could still get a loan from the bank. If lender mortgage insurance didn’t exist and if you didn’t have a 20% deposit, you might not be able to get a loan at all. So for those of you who are going to invest with a 5% to 15% deposit, you would need to keep saving, or the flipside of that is that they would still lend you the money but would give you much larger interest rates.
Even though lenders mortgage insurance is a fee that you have to pay, at least you could still get a loan and you could still get it at a good interest rate. It also allows you to get into the property market sooner, which may mean that you will see capital gains on your property during the time that it would have taken you to save for a deposit. If lenders mortgage insurance didn’t exist, then you probably wouldn’t be able to do that.
It seems to be an impossible question to answer because there’s so many different varying factors. For example, the value of the loan is a varying factor, the percentage of the deposit – that’s all going to affect the value of the lenders mortgage insurance that you have to pay. Basically, the larger the risk they feel they’re taking, the larger the lenders mortgage insurance is going to be. Also, they may take into account that you’ve got proven savings or not. If you don’t have proven savings, your lenders mortgage insurance might be higher. Another factor could be that lenders mortgage insurance varies from lender to lender. You may speak to your lender or mortgage broker to get a more accurate estimate of how much lenders mortgage insurance is going to cost.
You could save a larger deposit, or you could buy a cheaper property so your deposit is now worth a higher percentage of the property. Also, you can get a family guarantor on your loan. If you have parents or immediate family who are willing to put up their property as security for your loan, then the lender could take security from them, making it a less risky deal for them. Therefore, you would no longer need to pay the lenders mortgage insurance. Having a family member become a guarantor on your loan is a way to reduce or remove the need for lenders mortgage insurance.
A better approach to it is to look into your own situation and assess whether it’s worth it for you. Lenders mortgage insurance costs thousands of dollars so you need to weigh up if it’s worth investing in a property with a smaller deposit and pay thousands of dollars, compared to actually saving more to get a deposit. You may want to look at the risks versus the rewards. You could also ask yourself how much is the lenders mortgage insurance going to cost you, and are you going to make more money back than the lenders mortgage insurance is going to cost you.
You’ll be happy to lock a property down and pay some lenders mortgage insurance if you’ve done your research, you’re confident in the area, you’re assured with the property you’ve purchased, and you’ve got strategy to make money from that property. Especially if you’re not a good saver, it would be best to take action, lock the property in and move ahead.
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