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What does 85% LVR no LMI mean?
This is basically industry jargon for 85%Loan to Valuation Ratio (LVR) with no Lenders Mortgage Insurance (LMI) that would normally be applicable where a loan is above 80%. Its a product and lending policy designed specifically for high quality applications and the bank actually pays the insurance for you, potentially saving thousands.
Note: LMI is different to Mortgage Protection Insurance. LMI protects the bank whereas Mortgage Protection Insurance covers some of your mortgage repayments in the event of death, sickness, unemployment or disability.
What is LVR?
The LVR is a formula derived from dividing the total loans from the bank into the purchase price (contract price) of the property being purchased. The LVR calculation does not include costs such as stamp duty, legals etc.
LVR example 1 (80%)
$400,000 Loans approved through bank $500,000 Property purchase price The LVR is $400,000 divide by $500,000 so 80%. You would need $100,000 in savings plus another $20,000 or so for stamp duty, legals, inspections etc
LVR example 2 (85%)
$425,000 Loans approved through bank $500,000 Property purchase price The LVR is $425,000 divide by $500,000 so85%. You would need only $75,000 in savings plus another $20,500 or so for stamp duty, legals, inspections etcThe $25,000 reduction in deposit required means you can buy your home much earlier or do so without paying LMI, using the 85% LVR no LMI product.
What is LMI? Why do I need LMI?
Lenders Mortgage Insurance is an insurance product that protects the banks loss, should they have to sell your property and there is not enough money to pay out all the loans and costs. Where a lender has less than 20% deposit in a property, their risk of there being a shortfall increases, so an insurance premium is paid. As the losses can be high in dollar value, so too are the premiums.
Likewise, the smaller the deposit, the higher the risk, so there is an ever increasing ‘risk fee’ with the smaller the deposit you have. There are only a few insurers and lenders add different margins/ calculation to their rate, so there are major fluctuations in the final premium. Sometimes the insurance can be capitalised (added onto the loan amount) but in other cases you have to pay from additional savings.
LMI example 1 (20% deposit plus money for the costs)
$500,000 Property purchase price $100,000 Deposit (plus you’ll need extra for costs as below)$400,000 Loan required through the bankNote: An additional $20,000 in savings is required to cover costs (stamp duty, legals etc). As you have the money for the costs separately and the LVR is 80% there is no Mortgage Insurance payable.
LMI example 2 (20% deposit but no extra money for costs)
$500,000 Property purchase price $ 20,000 Extra funds required to cover the transfer costs e.g. Stamp duty etc (via increased loan)$100,000 Deposit/savings available$420,000 Base loan required through the bankThe LVR is 84% so the Mortgage Insurance is usually payable. This ranges from $3,500 – $5,000, so I have averaged to $4,250.$420,000 Base loan as above$ 4,250 Additional loan to cover insurance$424,250 Total loans required from the bank
Nearly all lenders will charge you similar to this example, but buy using the 85% LVR no LMI product, you can still borrow the $20,000 for the costs and pay no LMI so a saving of $4,250 which can then go to renovating, furniture, appliances etc.
LMI example 3 ( 5% deposit but no extra money for costs)
$500,000 Property purchase price$ 20,500 Extra funds required to cover the transfer costs (via increased loan)$ 45,500 Deposit/savings available$465,500 Base loan required through the bankLVR is 95% so Mortgage Insurance is payable. This ranges from $14,000 – $28,000, so I have averaged to $20,000.$465,500 Base loan as above$ 20,000 Additional loan to cover insurance$485,500 Total loans required from the bank (end LVR = 97.1%)
In this example you can see how much more you have to borrow to cover the insurance which means additional interest and principal repayments over time. Some lenders do not allow for an end loan over 95% so you may have to pay the LMI from additional savings which takes more saving time. Some lenders will capitalise (add the premium) on to the loan and some will do so, but only to a maximum of 97% so any extra required above this must come from savings.
Why does a lender offer 85% no LMI loan?
Only a couple of lenders offer this out of around 30 main lenders in the market. It is considered a ‘niche’ and there are the lender takes the risk and pays the insurance themself, but in exchange they scrutinise the applicants and the security even more, so only a handful of high quality applicants get through. The product does provide a great saving, can get you into the market sooner and the interest rates on offer are very competitive too.
The options and costs are complicated and a professional mortgage adviser will make the calculations, determine what the insurance premium is for each lender so that you may be able to save a lot of money there, and more so, they will check that you qualify against all the other general criteria with the lender.
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