By Guest 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 Guest 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 Guest Carol from Vista Financial
Here are a few points I wanted to make today in the mortgage space.
End of financial year is the busiest and most stressful time in the financial world so if you have purchased property and waiting to settle make sure you have discussed adequate time frames with your lender/broker/conveyancer as things may be slower than usual.
If you planned to settle before 1 July and have settlement is not already booked in it is unlikely to happen - so check! If you hope to settle just after EOFY, keep in mind any credit assessors will have a backlog of files to look at that they have pushed back so again, check to see you have been given realistic time frames.
Interest only periods
This topic is relevant at any time of the year.
Many people will be shortly coming up to the end of their approved interest only periods, particularly on investment loans (if you have interest only on owner occupied, that is very rare these days!). It will be harder to extend or be granted new interest only periods than when you first applied, so be prepared and don't leave it until the last minute!
Once upon a time you could have asked for up to 15 years interest only on investment properties... Had 10 and finishing? Well, back in the day it would be a quick call to the bank and here you go, here's another 5 years to keep you going. Sign on the dotted line, done. Gone are those days. If you have an interest only period then you need to be able to demonstrate you can repay the full debt, principal and interest, in the remaining term after your proposed interest only period expires (e.g. if you have 5 years interest only, can you repay the higher minimum payments required to pay the debt back to the bank over the 25 years left?).
The funny thing, is that this requirement is just plain responsible lending, so is actually nothing new to the industry! A prudent lender/broker/banker should always ensure you are able to pay your debts without financial difficulty, now or in the future.
Lenders are being more thorough in actually verifying this information now (that should always have been doing) since financial services regulator APRA (the Australian Prudential Regulation Authority) started putting their foot down by tightening requirements to evidence serviceability and by setting a speed limit on investor lending growth in 2014. This was in light of high levels of household debt, low interest rates and concerns over an overheating property market, particularly in Sydney and Melbourne. Banks steadily increased their rates on interest only as an incentive for people to switch to principal and interest (amongst other things some may say), the Banking Royal Commission brought further concerns out into the open, and here we are today. (There is a lot more to this story, but I that is for another post!)
APRA has recently dialed back on its investor cap policy but overall the responsibility of lenders, brokers and bankers alike remains now highlighted- make sure people can afford what they are doing. It does not matter what role you are in or who you work for, it comes down to the integrity of the individual to be a responsible lender and to do the right thing.
If you want to understand more about the interest only story, RBA's Assistant Governor (Financial Markets) Christopher Kent spoke to the Housing Industry Association in April this year, and his speech covers off a lot of aspects nicely.
What you need to do
No matter what rules are in place, what checks are made or what you are told you can afford on paper, you need to be sure you can afford to repay your debt and you are comfortable with how much your repayments are.
Check your options with your lender well before the end of your interest only period as the conversion to paying principal and interest can be a rude awakening! If you can't afford them, options include requesting a lower interest rate to reduce overall repayments, or refinancing or requesting a loan term extension so you have more time to repay at lower repayments per month. Reach out and ask for help to navigate your options.
It is tax time, and we all know sometimes this is the only time we speak to an accountant! So when you meet with them for your tax return, also ask them if having interest only on investment property loans is still a suitable strategy for you. Interest rates are a lot higher and things in your personal circumstance may be a lot different to when you first set up your loan(s) so make sure the structures in place are still relevant to you now.