The problem with lenders mortgage insurance
A few things really bug me about lenders mortgage insurance (LMI).
It's not portable, fewer and fewer lenders are offering a pro-rata rebate if you repay or refinance your loan in the first couple of years, and it's not cheap - though I can give you a few insider tips on how to cut your premium (more on that later).
LMI protects the lender, not you, if you default on your loan.
If what you owe is greater than the sale price of your home, your lender is entitled to make a claim on the mortgage insurer for the reimbursement of any shortfall. The insurer can then go after you for this shortfall.
Typically you will pay LMI if you borrow more than 80% of a property's value on a standard loan. At around 2% of the loan amount, LMI is not cheap.
So you can understand the barrier this can be when it comes to refinancing your home loan.
Because LMI is not portable, borrowers who want to refinance with a new lender before their equity has reached 20% of the property value will be up for LMI again - even if the property and borrower's conditions remain the same.
According to LMI provider Genworth, the government did explore the issue of allowing LMI to be portable in August 2011. However, it deemed it too complex to implement and administer.
Michael Daniels, a Smartline personal mortgage adviser, believes it may never be portable. "It's not the client's insurance policy, it's the bank's," he says.
Nevertheless, you would have hoped that LMI would have been tweaked to accommodate the growing number of borrowers who refinance their home loans.
Many first-timers who have borrowed more than 80% would be locked into their loan until they have sufficient equity to refinance without the need of LMI.
A lack of competition may be to blame. Apart from Genworth, there is only one other mortgage insurer in Australia - QBE. Daniels says banks do self-insure to varying degrees, but it's their understanding that they are all co-insuring with either Genworth or QBE.
As for pro-rata rebates, that's in the hand of the lender not the insurer.
"A partial refund of LMI premiums is offered by Genworth in the event that a loan is repaid within the first two years," says a Genworth spokesperson.
"While some lenders pass this on to the borrower concerned, others have chosen to offer discounted LMI premiums to all borrowers in lieu of refunds."
As for shopping around for a better premium, consumers need to realise that the "shopping around" needs to be done with the lender, not the insurer.
Premiums differ substantially among lenders but they are aligned within lenders, so technically you would need to compare lenders, not the two insurers.
"There can be a massive difference on the LMI costs between lenders," says Smartline mortgage broker Mark Ellard.
"A $470,000 loan against a $500,000 property could result in an LMI charge of between $11,055 and more than $20,000 with different lenders."
Another way to reduce your premium is to split your loans. For instance, LMI premiums on loans over $300,000 cost significantly more than those charged on loans less than $300,000.
Finder.com.au says if you were looking to buy two investment properties for each of which you need a $300,000 loan at an LVR of 95%, common sense would say to take out a loan for $600,000.
However, the premiums calculated on two $300,000 loans may be less than the LMI premium on a $600,000 loan.
According to the Genworth estimator, on a $600,000 loan for up to 30 years, with an LVR of 95%, the saving could be as much as $12,584, which more than makes up for the doubling-up of application fees from two loans.
Money Focus with Heidi Armstrong
Many people think of a line of credit simply as a way to access equity to purchase extra property.
What many forget is that it gives you far greater flexibility to diversify your investment portfolio into shares while avoiding the expensive and rigid requirements of margin loans.
A line of credit allows you to draw funds against your home or investment loan and you only pay interest on the amount drawn down.
In this way you fund your shares at competitive home loan interest rates rather than at the more expensive margin loan rates.
If using a line of credit to purchase equities or managed funds, you also get more control in deciding when to sell, unlike margin loans, which can impose nasty margin calls forcing you to sell part of your investment at a low price.