Lender’s Mortgage Insurance (LMI) can be a helpful tool for investors to build their property portfolios. In a moment I’ll explain how investors can use LMI creatively to buy more property, but let’s first start with an explanation of what it is…
LMI is a once-only premium payable by the borrower at settlement. The premium varies depending on the size of the loan, the loan type and the level of deposit. The premium must be either paid up front or in some instances can be capitalised into the loan up to the maximum acceptable loan to value ratio (LVR).
It is called lender’s mortgage insurance because it protects lenders from the risk of a borrower defaulting on their loan repayments. If the security property is required to be sold as a result of default, the net proceeds of the sale may not always cover the full balance outstanding on the loan. If the lender needs to recoup this loss, it is entitled to make a claim to the mortgage insurer for the reimbursement of the shortfall, as the terms of the insurance policy permit.
Lender’s mortgage insurance should not be confused with Mortgage Protection Insurance, which helps borrowers and their families to keep up their mortgage repayments in case of accident, sickness or death.
When is Lender’s Mortgage Insurance required?
As a general guide, LMI will be required where an LVR is more than 80 percent for a Full Doc loan and for LVR’s in excess of 60 percent up to 80 percent for a Low Doc loan.
There are two companies currently offering mortgage insurance in Australia, QBE LMI and Genworth. Their premiums are calculated based upon loan amount, LVR, loan type and security location. They classify acceptable security property into three categories of postcodes across all states and territories. Security that is located outside of these categories will be considered only for full doc loans.
Aggregate borrowing exposure per person has traditionally been limited to around $2.5 million, but in the current economic environment may be decreased on a case-by-case basis.
Both companies have similar underwriting guidelines, which are being constantly updated and adapted to the economic environment.
Under QBE LMI’s guidelines, qualifying loan types are Principal and Interest loans and Interest Only loans with an interest only period not exceeding 10 years, with a maximum loan term of 30 years for both Full and Low Doc loans.
Lines of Credit with contractual monthly payments that cover at least the accrued interest are also eligible. The maximum insured term is 25 years and the maximum LVR is 90 percent for Full Doc loans and 70 percent for Low Doc loans.
Genworth’s loan products differ slightly. It too offers Principal and Interest loans and Interest Only loans with an interest only period not exceeding 10 years. However the maximum loan term is more flexible with 40 years for Full Doc loans and 30 years for Low Doc loans.
For Full Doc loans in particular, a borrower may be able to purchase a property sooner than they had expected, since the repayments are more affordable because they are spread over a 30 year term. For the property investor, another benefit of mortgage insured loans is that, by borrowing at a higher LVR, he/she can preserve more of their own funds to use for further investment.
Creating Leverage with LMI
Mortgage insured loans can be used very effectively to create financial leverage.
For example, an investor may own an unencumbered property worth $250,000 and want to maximise leverage for purchasing investment properties.
With an 80 percent Loan to Value Ratio (LVR strategy), a conservative gearing startegy the total equity available is $200,000, which allows the purchase of properties with a value up to $765,000, also at 80 percent LVR.
With a 90 percent LVR strategy (a more aggressive gearing strategy) the total equity available is $225,000, which allows the purchase of properties with a value of up to $1.4 million at 90 percent LVR.
The ability to borrow at a higher LVR, substantially increases purchasing power, as demonstrated by the difference of $635,000 in the examples above.
The mortgage insurers keep changing their policies including lending criteria and their acceptable loan to value ratios, so its best to check with your mortgage broker to check their current policies
When developing an investment strategy it is important to look closely at the cost, risk and benefits of using LMI to increase LVR’s and the products available. We therefore suggest you talk to one of our experienced finance strategists to examine all available options to assist with selecting the one which is best suited to your overall investment strategy.
If you would like to know if using Lenders Mortgage Insurance is a suitable option for you please give us a call at Metropole Finance on 1300 782 534, we’d be happy to undertake a portfolio review for you or click here now to register for an obligation free consultation or just a quick phone chat.
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