The Barefoot Broker with JASON KHOURY: Lender Mortgage
This week, I’ve got five things about L.M.I (Lender Mortgage Insurance) that first home buyers definitely don’t know and their bank will never tell them.
Firstly, Lender Mortgage Insurance is an insurance policy taken by the bank for its own protection, that the borrower must pay for. Generally, it only applies when you need to borrow more than 80 per cent of the value of the property.
It’s just a one-off fee (which differs amongst all the banks) to be paid on settlement, when the bank will simply put it on top of the loan (capitalise).
Whilst LMI helps thousands of people get into homes faster, allowing people to not wait until they’ve saved the required 20 per cent, some ill-advised people don’t need to pay it at all or pay too much, so here we go:
It’s a little concerning that so many people borrow exactly 90 per cent and are happy to pay the required LMI stipulated by the bank’s online LMI calculator.
If only the banks explained the pricing thresholds.
Consider a property purchase price of $555,000: LMI costs $13,092 to borrow $500,000; LMI costs $ 9,354 to borrow $499,600.
So, by borrowing $400 less, you save $3,700!
It’s simply criminal that borrowers aren’t clearly made aware of the thresholds at work in the background.
Citibank lends up to 85 per cent without LMI! Other banks like Westpac also do from time-to-time. It’s a great option for those can scrape together the 15 per cent (plus stamp duty if applicable).
Professional sport players, accountants, lawyers and many medical professionals can borrow up to 90 per cent without LMI.
ANZ extend this offering to chiropractors (but not pharmacists).
At the same time, St George extends this to pharmacists, but not chiropractors!
If a borrower has a family member, perhaps a parent, who can provide a guarantee, that’s great.
Most don’t understand the simplicity of this. The parent only guarantees the bit the buyer doesn’t have to make the 20 per cent. That’s why it’s called a Limited Guarantee
In the example in Point 1 above, the parent would only need to guarantee an amount of $55,000, and that’s all they’re liable for if ever things went pear-shaped.
Presently, a parent can guarantee the whole 24 per cent, so the borrower can borrow the full purchase price and stamp duty too!
A kid can actually guarantee their parents too, at some banks.
If the guarantor has a home loan at a different lender, some banks are OK with this and will simply take a 2nd mortgage over their property, for the amount of the Limited Guarantee. Sometimes they add a 5% buffer.
In the future, the parent’s guarantee will be completely removed once the borrower’s loan amount represents 80% of the property’s value. This could be because the loan has been reduced, or the property has gone up in value (valuations are free).
Some banks don’t mind if the Guarantor is retired… but watch this space (hint hint).
We just helped Sally buy an apartment last month. She is so cranky that her NAB mobile banker told her 3 years ago that her mum couldn’t go guarantor because she didn’t work, and she believed this. She was out of the market for the last few years which has cost her at least $200K.
If someone has bought a place off-the-plan for $555,000, and they only have 10% deposit, they’ll need to pay LMI with most lenders.
But some banks will re-value the property on completion, and if it’s gone up by 10%, it’s now an 80% loan effectively so no LMI is payable! They must know if their bank goes off the lower of purchase price or valuation.
Banking Royal Commission
I think it’s great that the banking system is being thoroughly investigated because there are so many things that aren’t fair, I see it every day. I’m hoping the Commission also addresses why those people who go direct to their lenders themselves (for some perceived concept of loyalty), get taken advantage of every day.
Also, I don’t see too many people go broker from buying property. I hope attention soon gets to how banks market and issue credit cards, which is outrageous & currently completely unregulated.
Advice for younger credit consumers
Credit Cards are for convenience and to get free Qantas flights only. You can tick a box so that every 55 days the full amount due is swept in full from your offset or savings account. Just because your bank manager doesn’t tell you to do this automatically, please ask for the form, it’s normally the third and last box you need to tick
Your bank will never email you a link for you to click to go to your online banking. Do not fall for this, or a computer on the other side of the world will know which buttons on your keyboard are being pressed.
I’ve spent 20 years perfecting my craft, buying plenty of properties myself, and love helping all our clients get ahead safely with the right advice around ownership structures, land tax, asset protection and flexible lending structures.
Why some choose to deal with the 25-year-old at the bank with one credit policy, re-classification policy and one interest rate is fascinating to me. And sorry to the 25-year-old bankers out there – I was you once.
The percentage of Australians doing that is in steep decline, in small part, due to our clients sharing their iChoice experiences with others (particularly those in the medical industry) – a warm thank you to you all for your trust and support.