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What is lenders mortgage insurance?

I am borrowing for my first home and we have been told we have to have lenders mortgage insurance. What is it? And why do we have to have it? My parents said they were never forced to pay such insurance.

It could be that your parents came to their home loans with pretty big deposits and that means the lender has a nice buffer if a borrower fails to make repayments. Simply, if you are buying a property and have less than a 20 per cent deposit, you may be required to pay Lenders Mortgage Insurance.

This insures your lender against non-payment or default on your residential property loan. This type of insurance became really popular when lenders were making loans to purchasers to buy a home with as little as a five per cent deposit. Banks are pretty hard nowadays on these sorts of loans but if you look a bit risky they bring in the insurance.

It works by you paying a once-off fee to the lender when you get the home loan. The fees will depend on the amount borrowed and the size of your deposit. By the way, you can pay the fee up-front or add it to the total loan amount so it simply adds to your monthly repayments.

A lot of lenders go for this insurance option if you're borrowing more than 80 per cent of the property’s value.

While the insurance protects the lender if you default on your loan, there are pluses for the borrower. First time buyers benefit because it allows them to buy a home sooner with a smaller deposit. In times of rising property prices, buyers with smaller deposits can gain a foothold in the market and thereby increase their equity through capital growth. It also works well for working couples with big incomes but no savings.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. 

Published on: Wednesday, April 14, 2010

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