Finance: Low deposit for a home loan carries a cost - Lenders Mortgage Insurance

Richard Windeyer
Richard Windeyer

LENDERS mortgage insurance is generally charged by a lender when borrowing more than 80 per cent of a property's value when taking out a home loan.

This insurance insures the lender against any loss incurred if a borrower defaults on the loan and the net proceeds of an enforced sale of the property are insufficient to cover the remaining loan balance.

Keep in mind this insurance does not cover the borrower, so the mortgage insurer may still pursue the borrower to recoup the funds paid out.

Those looking to borrow should also be aware that this insurance is not transferable between loans.

For example, if you already have a mortgage and decide to refinance to a new loan or lender and the loan to value ratio remains more than 80 per cent you will likely be required to pay this insurance again.

While borrowers may feel disheartened by paying insurance to benefit the lenders, the insurance is often a necessary evil.

If the lenders could not cover their risk, they would be unlikely to lend up to 95 per cent of a property's value.

In other words, without this insurance, you would be hard-pressed to get a home loan with a deposit of less than 20 per cent of the purchase price.

This insurance may be the saving grace that helps some enter the property market sooner and with a smaller deposit.

However, the decision to pay this insurance and jump in now as opposed to holding off and saving a larger deposit needs to be weighed up carefully.

Borrowers need to consider factors such as what price they put on being able to buy a property at today's prices compared to how much a property's value may rise while they save a larger deposit.

The lender will calculate the premium by taking into consideration the borrower's loan size compared to the value of the property and aspects of the property itself such as type, location and size.

The cost of this insurance can be anywhere from a few hundred to many thousands of dollars.

For more information phone Richard Windeyer on 1800 01 LOAN (5626).