LMI - What Value Do You Get in Paying This? Why Don't Banks Consider a Refund for Prompt Payments?

LThebestdealfinder on 22/06/2016 - 16:39

In Australia, if you want to buy home and borrow more than 80% of property purchase cost, you have to pay Lenders Mortgage Insurance (LMI) to protect the bank/lender, so that the bank can recover the property without incurring loss in case of payment defaults.

Every home buyer borrowing above 80% pay an extra 7-14K on top of loan depending on Loan Value Ratio, which increases the burden of the buyers trying to save up a deposit.
Its for the bank to cover risks that they charge the LMI from every customer, however if you consider the likelyhood of risk being realised, I believe it is very low.
This is because most of the buyers, especially the young first home buyers don't wait until their bank balance hits 20% of the price, they find a pretty good deal when their deposits are slightly lower, so they buy the property without waiting an additional year to save up when the property value will have increased as well.
Therefore most of the buyers step in early to the real estate market, and the LMI adds burden to the buyers and generates large revenue for LMI insurers. Banks can include LMI as part of the loan, which means you will be paying interest on the LMI as well!

After purchasing the house the buyers gain equity of more than 20% by gradually paying it off or as a result of a better valuation when the land value appreciates! However once an LMI is paid, it is never returned. Isn't it an unfair deal that gives absolutely zero value to the customer?

At least the banks could refund a part of LMI if the payment is prompt for a few years, or the moment when LVR falls below 80%. Or it would be great if they waive interest on LMI capitalised on to the loan. Why none of the banks is thinking about it? Any such bank could undoubtedly win more business if they do it. I agree there is an element of risk in it, however I see the rewards for taking that risk would outweigh the risk, considering the volume of business they win due to this difference! Let me know your thoughts as Ozbargainers who like to save money and spend it wisely, to get more value out of every dollar!

Financial

Comments

  • ShortyX on 22/06/2016 - 16:50
    +8

    After purchasing the house the buyers gain equity of more than 20%

    Never guaranteed.

    At the end of the day, it's insurance for the banks. You don't get a refund on house insurance if your house doesn't burn down nor car insurance if you don't have a crash.

  • bobbified on 22/06/2016 - 17:04

    There is no incentive for the bank to refund any of the LMI. They're not called "banks" for no reason!
    It's in your own interests to pay your mortgage payments on time for the sake of not accruing extra interest on your outstanding amount.

    As with any other insurance, the cost of LMI is calculated based on the risk for a fixed period. In this case, the fixed period is between the time you take out the loan and the amount of time it takes for you hold 20% of the equity based on your minimum repayments. So by the time you have 20% equity, there is actually no premium to be refunded.

    If you're talking about the house price fluctuations, I don't think it'll be reasonable for them to keep sending valuers out to your home to work out whether 80% of the market value of your home will cover your outstanding loan amount.

    What you're saying can go both ways - It wouldn't be great if the value of your home dropped during bad economic times and 80% of the market value of your home no longer covers your outstanding loan amount and they forced you to take out LMI or threaten to repossess the home.

  • loulou1 on 22/06/2016 - 17:10
    +1

    If you repay your loan within twelve months you can generally receive a partial LMI refund http://www.yourmortgage.com.au/article/lmi-refund-78269.aspx
    In some cases, this may make it worthwhile to refinance your loan before twelve months is up if your LVR becomes below 80%

  • rambutann on 22/06/2016 - 17:41

    LMI does not benefit you in any way, it simply gives the bank peace of mind in providing you with a loan.

  • hellbound on 22/06/2016 - 18:14
    +6

    that gives absolutely zero value to the customer?

    Well it allows the customer to obtain a sizeable amount of money without the required security, so it certainly gives value to the customer.

    • Olokun on 22/06/2016 - 19:50

      This. The value you get is that there are lenders willing to lend to you.

  • tonyjzx on 22/06/2016 - 19:40
    +1

    I agree with the OP thru his hundred word screed. It comes down to this… do you want to borrow? Do you not have 20% deposit? no? Well then pay LMI.

    Full stop. They're the lender, you're the borrower, its their rules. If you dont want to play this game, be a renter, or get 20%. Your choice.

  • ilikeradiohead on 22/06/2016 - 20:47

    Like others have said it is insurance. You don't get a refund on your car insurance if you don't crash your car. I guess the difference is that you are paying for the insurance that the bank is taking out on your behalf.

  • airzone on 22/06/2016 - 21:27

    Cost of the transaction. For a new buyer saving a deposit, it's going to be the LMI cost vs the opportunity cost.

  • pyramid on 22/06/2016 - 23:01

    If i m renting and having 10% deposit, shouldn't i pay LMI, get home loan and move into my home rather than paying rent for another year to accumulate additional 10% deposit to make it 205? I m not sure how interest rate works with LMI and Zero LMI.

    • ihbh on 23/06/2016 - 13:34

      Nope, you need to do a cost benefit analysis.

      Renting is not dead money if you invest your 10% deposit in something else - it could earn a return.

      If you buy to live in, you incur interest and LMI cost that could be much more than your rental cost for a similar property, or you buy an investment property, the net return could be less than the return on your 10% deposit invested elsewhere. You might require substantial capital growth to make up the difference, which isn't guaranteed, especially after sunk a strong run in the property markets around Australia.

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