The little-known trick that could save you from paying LMI.
Lenders mortgage insurance: it’s a necessary evil for many property investors, and it certainly has the potential to eat through a big chunk of your cash or equity.
LMI acts as an insurance premium for your lender, not for you as the borrower (although you’re the one stuck paying the fee).
Without the advent of LMI, every borrower would be required to save a minimum 20 per cent deposit before buying a home or investment property – so for this reason alone, we must be thankful for its existence.
That said, LMI premiums have risen substantially in recent years. Before the GFC, LMI was typically a small, manageable fee that was levied to borrowers who wished to access funding of more than 80 per cent. The financial fallout of risky lending practices in the second half of the last decade saw LMI premiums soar, to the point where they now rival stamp duty levies in some instances.
I can recall, back in 2009, helping a client settle a loan on an investment property where she was borrowing 95 per cent of the purchase price. The loan process had drawn out over six months, for a number of reasons, and during that period her LMI premium had increased from $12,500 to more than $17,000!
Fortunately, we were able to negotiate with the bank and meet in the middle at around $15,000, but this example demonstrates just how much capital property buyers may need to set aside for LMI.
Did you know there was a way to avoid paying LMI?
There’s a little-known secret in the mortgage business, which many homeowners and investors (and indeed, even some mortgage brokers!) are not aware of.
It is a somewhat low-key clause that banks share only with their most ‘low risk’ clients, known as professional borrowers, who can access a range of interest rate discounts and fee waivers due to their A-grade risk profile.
These industries include professional, white-collar careers such as:
- Medical professionals
- Finance and accounting professionals, including auditors and actuaries
- Lawyers, barristers and conveyancers
- Engineers and surveyors
- Select mining fields
There are a number of conditions borrowers need to satisfy to have their LMI waived, such as membership to their relevant industry association, and a minimum income/time spent in your career.
If you’re approved for this fee waiver, you could save thousands of dollars on your next property purchase.
However, if you don’t meet the criteria, there may be other options available to you to save money on your loan.
For instance, some lenders opt not to use mortgage insurers. Instead, they self-insure or underwrite their own loans by establishing their own internal risk process.
For borrowers, this means your loan application will involve just one step – being processed through your bank – rather than two steps, which includes
being assessed by your bank or lender and then being assessed by your mortgage insurer.
Those lenders that choose to self-insure often have more flexibility when it comes to levelling an in-house ‘risk fee’ or ‘reduced equity fee’. On a $650,000, 90 per cent loan, for instance, you might pay a risk fee of $9,000, where a standard LMI premium could set you back up to $15,000.
With savings this substantial up for grabs, it’s important that you engage a professional mortgage broker when obtaining finance for your next property purchase.
If you’re borrowing for an investment property, then you ideally want to work with a broker who is experienced working with investors, as they’ll be able to help you negotiate the best fees, terms and rates for your unique situation.