Lenders Mortgage Insurance and Some Of The Hiccups
Your Finance is approved, and everything appears to be swimming along… or is it?
Your finance has been approved and you have your offer in writing, but your deposit amount requires you to take out Lenders Mortgage Insurance (LMI).
What is LMI? – this is insurance top protects the lender from a downturn in the mortgage value, their position is insured. It is not insurance for the purchaser.
I often remind purchasers that when they are in bed with a bank or financier, they are receiving unparalleled leverage where 5% or 10% effectively controls millions of dollars. However, you are only the custodian of the property while you pay your mortgage on time… and soon as you don’t the lender has default step-in rights. If they sell the property as Mortgagee in Possession the financier keeps the lot!
A common hurdle is that the client is fully approved as a good credit risk for loan servicing by the financier, but it does not stop there with the bank. The banks often underwrite or insure their own position of the home loan in case of default. This is where LMI is used. Before LMI is granted the financier will need to validate the final contract price and value of the property. This will be checked against this contract price. If the bank’s assessment is contradictory to the sale price you will need to contribute more money.
When buying a property this is where it is a case once again of ‘Chicken before the egg’. You want to know your approval, but you can’t get that till your name is on a contract. This still creates an area of risk. What if you sign the contract and LMI is refused or at a lesser loan value amount? Once again you will have to cover the gap. Luckily a good buyer’s agent will help navigate this risk, particularly if the property is acquired at a value point under the market normal. I have done this on several occasions. The buyer’s agent de-risks their client with a purchase that is a discount to market or exceptionally good buying.
It is time to make an offer and you need to be decisive. LMI can be a complication in making an offer because of this gap – needing a contract price before confirming your loan creates uncertainty. It is often the case that your legal representative will advise you not to enter the transaction because you are exposed. You defy your legal representative’s advice at your own peril. However, being practical has to come into it.
LMI starts with the banks’ exposure. If the value of your property is less than the contract price then you are liable for the difference in their Loan to Value Ratio (LVR) e.g., Purchase for $1,000,000, you have a 5% deposit ($ 50,000 + stamp duty) LMI will be needed, the bank lends you 95% with LMI ($ 950,000). If the property values are at $950,000 the bank will only lend you $902,500, not $950,000. You must be able to find the extra funds (-$47,500)
This issue can make your preapproval conditional upon this – which does leave you vulnerable.
Where a buyer’s agent can help – by accurately assessing the value of the property and negotiating below comparable similar product the BA is ensuring that the bank will meet the contract price
A contrarian view is for the investors where it makes sense to get LMI whether you need it or not as it preserves your cash (less for a deposit) and the LMI is a legitimate business cost that is tax-deductible. Something that is often overlooked
For more information contact Gary 0425 232 115
