There’s an article in the news today (https://www.brokernews.com.au/news/breaking-news/consumers-ripped-off-by-lmi-greed-184580.aspx) that says LMI (lenders mortgage insurance) is a rip off – I don’t agree. It’s a tool, a cost of opportunity without which you cannot get into the market, let’s look at LMI:
Lenders Mortgage Insurance is simply an insurance that is taken out by the lender to cover your loan in the event that you default on your repayments, and for a very long time I might add.
It protects the bank, but you foot the bill if you are borrowing more than 80% of your property value. What happens in the case of you being completely unable to make your repayments is that your property is sold and if there’s not enough money from the sale to cover your whole debt the insurance is there to cover the difference. Its doesn’t end there though, the insurer has a right to chase you to recover their loss, perhaps they’ll be successful, perhaps not – one would assume that if you had spare assets or cash you’d have made your repayments.
Now – a side note here, this doesn’t happen overnight, there are very strict procedures in place surrounding hardship and your inability to meet your repayments, and the bank’s responsibilities to render assistance. I can tell you I know of one case where the lender (CBA in this case) was exceptionally lenient with a borrower who was behind for more than 2 years, and gave him every possible assistance to keep his home. Noone is keen on selling you up, insurance or no.
Back to the insurance. It can be very very expensive, one might say ridiculously so, and I would argue that considering the very low rate of claims the premiums are too high, but thats an economic debate that you and I are not privy to. But its a tool to get into the property market before you’ve saved your 20% deposit and enough spare to cover your costs. Let me ask you this – if you had to save the 20% of an average property price how long would it take you? And how much would the property value rise in this time? Can you see you could be chasing your tail for a very long time? (Leaving aside debate that perhaps the access to easy finance is a driver behind property price rises).
If you could, for example, pay a $4,500 mortgage insurance fee to get yourself into a property today, and avoid this rise – would you see the value in it? I can tell you in an example on my desk last week the borrower in question chose not to, chose to save like crazy and did very well. Came back in 6 months time and guess what – property prices have risen in that time by $50,000! So now we are proceeding with a $50,000 higher purchase price (and a $6,500 mortgage insurance bill).
There are ways to avoid the insurance or reduce the price too – the premium varies from lender to lender so a good broker considers this as part of the proposal, and with assistance from family it could disappear altogether. We are not without options.
So my thoughts, is it a rip off – no, it’s a tool. Is it more expensive than I would like – perhaps.
Would I like to see more competition (there are really only two insurers in Australia) – yes.
Would I like to see it made portable, yes absolutely! That would save a lot of money – but also lose a lot of revenue for our insurance companies… thats another debate again!