Lenders mortgage insurance is one of the most important things you will need to understand when applying for a home loan. Let’s not get bogged down in too much technical talk and get down to the basics.

Every time you apply for a home loan your bank needs to ensure that it is minimising its risks. Naturally, they do everything they can to establish whether or not you can afford alone and have a good enough credit history to prove that you are likely to be honest and make your payments on time.

But the bottom line is that they will always want to protect their interests. So, whenever you borrow more than 80% of the value of a property the bank ensures itself against a future loss. They insure themselves by taking out a lenders mortgage insurance policy, but they make the borrower pay the premium!

Is Lenders Mortgage Insurance a Bad Thing?

This is not necessarily a bad thing because the insurance policy makes it possible for banks to give loans to people who might not otherwise qualify. When you think about it, without mortgage insurance like this many first home buyers would not be able to get into the market at all.

In the first place they would have to have saved at least 20% of the purchase price. With home values rising over the last few years and with an estimate of major capital cities having an average price of around $500,000, this means that first home buyers would have to save a deposit of $100,000.

If this was the case most new home buyers would be having to wait until they were in their 30s or 40s before applying for a loan. Can you imagine the impact on the Australian property market if this were the case? So, although mortgage insurance premiums are quite high, usually several thousands of dollars, it makes it easy for people to enter the home loan market.

Let’s take a look at some of the details to give you a better understanding of how this all works.

First of all, lenders mortgage insurance policies usually only cover the bank’s risk for the first two years of the loan. For this reason there is only one premium to be paid, it is not a yearly insurance policy in the usual sense.

Secondly, many lenders will actually add the cost of the lenders mortgage insurance premium on to the loan so that you as the borrower do not have to come up with the extra money.

How Much Does Lenders Mortgage Insurance Cost?

Now, let’s look at the costs involved. Exactly how much does a mortgage insurance premium cost? Well, the easiest way to find out is to go online and look for a lenders mortgage insurance premium calculator. Remember the price of these policies can change regularly in line with market conditions so make sure you check before you make your application. If you are not certain that you are obtaining the right figure, simply contact your mortgage broker who will be old to tell you the exact figure in a flash.

One of the best sites work out the cost of the premium is here.

Lenders mortgage insurance premiums vary according to the type of loan you want to take out. There are currently discounts available for first home buyers, but this policy could change at any moment so always check before you buy!

Lenders mortgage insurance is a key element of the Australian home loan market which provides banks with the flexibility they need to extend lending products to respond to the needs of a changing marketplace.

But, of course, lenders mortgage insurance companies also want to hedge their bets. What I mean is that just because a bank can ensures a loan it doesn’t always make it easy for anyone to obtain home loan finance. Far from it.

Lenders mortgage insurance companies have introduced astringent array of credit policies which in turn affect banks lending policies. This means that borrowers who fall into the lenders mortgage insurance category will have to satisfy the lending criteria established by the insurance company.

As the loan to value ratio increases, the risk of loss increases which means that premiums are also higher. Even more importantly, the lending criteria gets tighter and tighter.

The bottom line is that if you want to borrow 95% of the value of a property you will need to have a solid working history over a number of years, be earning a good salary and have a clear credit history. If you fail on any one of these tests and several other ones to boot, you simply won’t qualify for a housing loan.

After the global financial crisis the lending criteria established by lenders mortgage insurance companies became tighter and tighter. Many lending products were abandoned and it is only been in the early months of 2011 that some of these products have started to re-emerge in the marketplace.

Here are a list of the things which are important to all lenders mortgage insurance company that impinge upon the assessment policy of the banks.

• Clear credit history. Even the smallest blemish such as failure to pay a Telco bill two years ago can be enough to have your loan application declined.
• Stable work history. You will need to have been in your current employment for at least one year, and in some cases up to 2 years depending upon individual circumstances.
• The salary required to qualify for loan may be higher than otherwise required by a bank. This means that using online loan capacity calculators may not be accurate if you fall into this category.
• The property must be located in an approved postcode. It is a simple fact that some postcodes are not covered by the lenders mortgage insurance companies and your loan can be declined if your desired property is in the wrong area.

A ballpark figure for the lenders mortgage insurance premium is difficult to give here. If you need a loan of say, $475,000 to purchase a property with a value of $500,000 will incur a premium of around $14,400.

Remember, this can be added to your loan but it will mean increasing your monthly repayments by approximately $100.

The bottom line is that the bigger deposit you have, the cheaper the premium will be, and the less you will have to borrow. Understanding lenders mortgage insurance is vital so you can prepare yourself for the application process.

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