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Www Homeloanhomefinancing E Payday No 1 Home Loan Home Financing Mortgage Insurance – Sex, Lies and Deception (But without the Sex) part one | Spank Your Bank Blog

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Mortgage Insurance may not mean what you think it means

My question for today is, “What did you think you were getting when you were told that you needed to get mortgage insurance on your home loan?”

I thought I was getting insurance for myself if something went awry. I was the one paying $10,070, so I figured I was the one getting the insurance – Silly me for not taking the time to read the fine print and also to discover the real name for mortgage insurance (my semi-legitimate excuse – I signed my loan contract with my two year old in tow, which, as I’m sure you can imagine, is highly conducive to being able to give something your undivided attention).

Mortgage insurance also goes by the name LMI which stands for “Lender’s Mortgage Insurance”. And if the name doesn’t give it away, then I’ll get NAB’s FAQ about LMI to answer what and who LMI is for,

Lenders Mortgage Insurance (LMI)

Insurance taken out by the lender (e.g. NAB) to protect itself from default by the borrower. Generally required for home loans with a Loan to Value Ratio (LVR) above 80%.

Link to NAB pdf that says this (glossary, pg 9) – accessed 13 Jan 2011

I chose NAB’s definition because it had my most favourite wording of all, “Insurance taken out by the lender to protect itself…” Where is the part where it says Insurance paid by the borrower???????????

You know what, I don’t feel like paying for my car insurance any more. I think I might ring up my local petrol station and ask them to pay it for me. They won’t mind because I’ll tell them that they won’t have to pay the amount up front, they can just absorb the cost when I fill up with petrol and if they don’t agree to this, then I won’t fill up with petrol there any more. There will be benefits for them too. Because driving my car around will be risk free, I’ll drive it more, thus use more petrol. It’s a Win Win!

Can someone please explain to me how my above suggestion is any more ludicrous than an insurance policy that the banks ask us to pay for them?

Wouldn’t a better alternative be, don’t lend money to people who are likely to default, or, I don’t know, suggest that a customer takes out insurance for themselves that, in turn, covers the banks?

It’s ok. ANZ assures us that there are benefits not just for the bank, but for you too.

This is the part where I enjoyed what ANZ had to say about the “Benefits of LMI” for the people (that would be you and me) who pay for this insurance,

Benefits of LMI

While LMI is primarily about protecting the lender there are also benefits for the borrower.

·   It allows buyers to buy a home sooner with a smaller deposit.

·   When trading up, it can increase your choice of properties by allowing you access to a wider price range.

·   It allows borrowers to retain some of their capital for other purposes – buying a car or investing in shares.

link to ANZ page with this content –  accessed 13 Jan 2011

I think what ANZ really means is, it allows us to take a bigger risk (profit profit profit )and offer you something before you’re in a position to 100% be capable of affording it.

Banks imply that LMI is a favour that they are doing for us. And, yet, what are their benefits? Here’s my list of LMI benefits for the bank in addition to it “protecting” them,

• Banks get to charge you interest on your LMI too (more about this one later – it’s great!)

• Banks make even more money off you – Someone who borrows more than they can potentially handle pays SOOOOOOOOOOOOOOO much more interest.

• Some banks provide their own lender’s mortgage insurance (Westpac and ANZ). Does this mean they get us to pay them for insurance for themselves and when we can’t meet our repayments, they give themselves money and then come and chase after us to get back the money that they just gave to themselves? Hmmmmm….

And after all this, I really feel the need to ask, ‘What is to prevent our banks from paying for their own insurance?’ I’m sure they have every right to take out insurance, but that should be their responsibility to pay for it. I don’t ask them to pay for my insurance.

Now, I guess I really was juvenile when looking into this whole getting a home loan thing because I also didn’t realise the amount that LMI actually insured the banks for.

How LMI Works

This next bit is a little bit about how LMI works. To get us started, let’s have another look at ANZ (don’t worry, we’ll get to CBA and WBC) and their explanation,

How does it work?

LMI is a one-off fee paid by borrowers when they take out a home loan. Fees vary according to the amount borrowed and the size of your deposit.

In the event that the lender needs to sell their property and the proceeds do not fully repay the loan, the lender can make a claim for the difference from the insurer. In that case, the borrower is still legally liable to repay the insurer.

Link to ANZ’s “How Does LMI Work” page – accessed 13 Jan 2011

ANZ’s explanation tells you two things – Two very important things in fact:

1. It’s only worth the shortfall

2. You then owe the LMI insurer the shortfall

1. It’s only worth the shortfall

Lender’s Mortgage Insurance only covers your bank for the difference. The ‘difference’ is also known as ‘the shortfall’ and is the possible outstanding amount after the bank has sold your house. What I’m saying here is, LMI does not cover the cost of your entire property, just the remainder of the bank’s fire sale. Now, don’t fret. We’re going to do a little bit of maths to see exactly how much this ‘difference’ is likely to be.

In order to do this, let’s create a hypothetical Scenario (it’s a little convoluted, but I think it’s made that way so that we don’t look too closely at the numbers, so stick with me). This is also where I feel the need to add a disclaimer. I am not and likely never will be an expert on property or mathematical formulae. What I am is a housewife with two children and a large mortgage . So if you’re an expert and you come along and see that I’ve potentially failed in my equations, please let me know!

Jack and Jill buy their first home for $700,000 (the median house price in Sydney). Even though the house sells for a comfortable $700,000 (with competition and the like), the banks are being conservative and only value the property at 90% of the sale price which is $630,000 (I’m being generous here. Property advisors say that banks have been valuing 20-30% below the actual market value since the GFC).

Jack and Jill are actually in a pretty fortunate position because their parents have given them $70,000 towards their first home. The government is going to give them $7,000 and they’ve managed to save $35,000.