By Carol from Vista Financial
What is it?
Lenders Mortgage Insurance or LMI is an insurance policy that protects the bank from financial loss if you can’t pay your loan back.
LMI cover protects the lender, and you pay the premium. That’s right, you are paying to protect the bank from yourself!
When/why is LMI applicable?
Normally LMI is required if you request to borrow more than 80% of the property value, as this is deemed riskier to the lender.
Why? You’ve put less money in, your repayments will be higher, and they have more to lose. So, they hedge their bets by insuring themselves.
If you default on the loan (i.e. don’t/can’t pay), they will chase you for the funds. If that doesn’t work and as a last resort, they will re-possess and sell the house to pay the debt.
If the sale of the property isn’t enough to pay the outstanding debt, the lender makes a claim with the insurer to recover the difference.
(Important to note – even if the lender gets all the money back from the sale or insurer, this is doesn’t absolve you from your debt – there is sadly no get-out-of-jail-free card.)
How much is it?
LMI can be very expensive. The cost is determined by a number of factors including the loan to value ratio (i.e. how much you are borrowing compared to the purchase price), the size of the loan you want (costs increase exponentially), if you are a first home buyer or not, and the insurer. The two main insurers in Australia are QBE and Genworth, but some lenders also self-insure.
You can get a rough idea on the cost of LMI here, but take it with a grain of salt as it does vary between lenders.
How do you pay for it?
You can pay it upfront or most lenders will allow you to add this to the home loan amount (i.e. capitalise it). Most people opt to add it to the loan.
Why on Earth would you choose to pay LMI?
Saving a 20% deposit is very hard, and can be almost impossible for some. LMI enables you to purchase without having to have 20% deposit, so is actually quite a popular option.
How to avoid LMI?
Save like crazy to have a 20% deposit.
If not, there may be other options, including gifted funds from the Bank of Mum and Dad or using a guarantor.
For a lucky few LMI waivers sometimes exist with some lenders – normally restricted to those in the medical profession or specific white-collar professions. Normally strict criteria apply.
Important fact to remember
LMI protects the lender, it does not protect you!
As a borrower, this type of insurance does not offer you any protection whatsoever.
LMI is often confused with mortgage protection insurance - a type of insurance that protects you if you lose your job/fall ill and can’t meet a repayment. This is a completely different insurance, so note the difference.
If you still have any questions regarding LMI, get in touch so I can help.
By Carol from Vista Financial
This report into housing has been released recently, produced by BIS Oxford Economics for QBE Lenders’ Mortgage Insurance.
You may read the report on their website or download the full interactive PDF report here.
Short on time? Watch their short video instead.
If you want to read more download the PDF and click on the titles on the contents page to navigate to the parts you care about.
Where did this report come from?
QBE is one of the two main lenders mortgage insurance providers in Australia - the other being Genworth.
BIS Oxford Economics is a large macroeconomics and industry forecast provider. The two companies have partnered for the last 17 years to generate these reports.
What is LMI?
Lenders mortgage insurance (LMI) is an insurance you pay if you have less than 20% deposit (i.e. you borrow more than 80%) for a property purchase.
LMI protects the lender, it does not protect you.
If you put in less cash, it is a riskier transaction for the lender. Hence they hedge their bets. If you can't pay, they will chase you for the funds, and they submit a claim through the LMI provider to try recoup their losses.
That's right, you pay for the lender's insurance premium so they are protected from you! Normally the LMI premium can be added on top of the the base loan amount (capitalised). Or you can save like crazy to have a 20% deposit, or use a guarantor.
Are their predictions for the future accurate?
Who knows, I don't have a crystal ball either. This is an outlook report - an insight into the property market in Australia. A predication is still essentially an educated guess, but an interesting read nonetheless. I am providing it here as one source of information. Make of it what you may.
By Carol from Vista Financial
How long does it take after moving to Oz to secure a mortgage? Short answer: it depends.
I can see the rolling of the eyes from here.
Different banks have different criteria, you need to tick the boxes. However long that takes, that is how long you have to wait.
There are no hard fast rules on how long you ‘should wait’ to buy a house but there are some important things to know.
The process itself is super quick
The actual purchase process here is a lot quicker than in the UK. The never ending chain of teetering disappointment is very rare here. Property is bought and sold within weeks.
Find out how much the banks will lend you, find a suitable house, put an offer down, exchange contracts, settle and move in. From start to finish in Australia you can be putting down an offer on a house today and potentially be moving in 6 weeks later. It can be that quick.
Are you actually ready to buy?
Why do you want to buy? Are you in a rush to buy? Why? Do you know the exact state and suburb you want to live in? Will the kids be accepted into the school there? Are you happy with that school? Is your commute to work a nightmare? Is it a dodgy area?
If you have just arrived, renting is a great way to get to know Australia and trial out living in different places so you know exactly where you want to buy. The last thing you want to do is buy in an area soon after arriving only to realise your dream location is on the other side of the country.
Where to start
Ok, let’s assume you are set on buying as soon as possible. The first step is figuring out what it will cost overall and where is the money coming from.
If you have enough to cover the shortfall between what it costs and what the bank will lend, you are good to go.
If you don’t, then you need a plan on how to change that. Do you need to save more? Or do you need to wait for some circumstance to change so the banks are more favourable towards you (e.g. do you need to complete probation? Does the bank require you to have worked for longer than 6 months?).
If you are a PR or Australian Citizen with 20% deposit (plus costs) then happy days, the banking world welcomes you with open arms.
If not, don’t give up! There are so many different banks and policies out there so you don’t know exactly until you have had a professional unequivocally tell you so AND (most importantly) what you need to do to change that. If you are a temporary resident most banks may only lend you 60 – 70% these days. BUT if you purchase with someone who is PR or a Citizen then it can be a whole different ball game. It all drills down to finding the best fit for you.
One last thing.
Comprehensive Credit Reporting (CCR)- Australia is catching up
If you are coming from the UK you probably already know all about credit scoring and the importance of having a clean bill of financial health. Australia has technically had CCR in place since 2014, but the uptake has been sluggish. This is about to change and may be a rude awakening for a lot of Aussies. From 1 July 2019 all major banks are required to share 100% of their data with credit reporting bodies, so this will become more and more relevant here, as it is in the UK, in the coming years.
As of right now, lenders are slowing sharing their data and eventually will use this as a tool in their lending decision making. So whilst I wouldn't run to get an Aussie credit card, it is not a bad idea to think about ways to start developing your credit rating here, because it will be a brand new file. Setting up with an Australian phone plan is a good start, and if you are renting first even paying your utilities bills on time can help build up your score.
Keep in mind that yes, a good credit score can help, but some banks value it more than others and it is not the be all and end all at the moment. What is more important is knowing which bank to go with and what is best for your particular circumstance.
Hope this helps, any questions feel free to ask!
By Carol from Vista Financial
Bit behind the 8 ball and catching up on some posts after a few busy weeks. A lot happening in the mortgage market with rate moves, refinance offers, lending policy changes, the Banking Royal Commission interim report released and more!
First things first - the RBA.
Last week to no ones surprise the RBA left rates on hold again:
"In Australia, money-market interest rates are higher than they were at the start of the year, although they have declined since the end of June. In response, some lenders have increased their standard variable mortgage rates by small amounts, while at the same time reducing mortgage rates for some new loans.
...Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Growth in credit extended to owner-occupiers remains robust, but demand by investors has slowed noticeably as the dynamics of the housing market have changed. Credit conditions are tighter than they have been for some time, although mortgage rates remain low and there is strong competition for borrowers of high credit quality."
Full release can be read here
More on the rest soon, watch this space!