The perils of a small deposit



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Forget mortgage exit fees, the real sting when refinancing a home loan can be a double dose of lender’s mortgage insurance.

On July 1, last year the Federal Government removed an important roadblock for homeowners wishing to switch mortgage lenders by banning mortgage exit fees. However, while this was seen as a positive step in the right direction, many cash-strapped homeowners are surprised to find additional costs such as lender’s mortgage insurance (LMI) are still charged when refinancing a loan.

According to lender’s mortgage insurance provider, Genworth, a borrower looking to refinance their loan with a 10 percent deposit on a $300,000 mortgage could pay an LMI premium of $3672 in addition to the usual refinance fees charged by a lender. For some borrowers, this could be the second time they’ve paid LMI for the same loan. Clearly, paying over 1 percent of the total loan cost in LMI can put a significant dent in the plans of any homeowner trying to make the switch.

“Homeowners must recognise that the refinanced loan is actually a new contract with a new lender,” said Lisa Montgomery, chief executive officer of Resi Mortgage Corporation.

“The LMI is designed to protect the new lender, not the borrower, from any loss should the borrower default on their loan.”

Usually paid by the borrower as a one-off fee (though it can be added to the mortgage loan), lender’s mortgage insurance typically applies to mortgages where over 80 percent of the purchase price is financed.  That said, there are circumstances where it can also be charged on loans as low as a 60 percent loan to value ratio (LVR).

“The amount of LMI a homeowner pays will vary from lender to lender and takes into account things such as the borrowed amount, loan to valuation ratio, property location, purpose of the loan and whether the borrower is employed or self-employed,” she said.

Despite LMI traditionally getting a bad rap there is a benefit to its cost, according to Montgomery.

A RateCity study recently revealed the difficulty experienced by many home buyers when trying to save for a loan deposit. The study found the average homebuyer can take up to 13 years to accrue the recommended 20 percent deposit on a $300,000 loan.

“In a perfect world, we would all have at least a 20 percent deposit to put towards our home loan and avoid the LMI,” said Montgomery.

“However this is not a perfect world, and the LMI is the premium that assists borrowers to purchase a property sooner at a higher than 80 percent LVR, regardless if this is your first loan or you are refinancing an existing loan.”

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