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Why you should care about Mortgage Insurance

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Despite how it sounds “Mortgage Insurance” is an insurance that insures the LENDER if something goes wrong with your loan.  The mortgagor i.e. the person taking out the loan, does not benefit from this insurance, but they do have to pay the premium (thousands or tens of thousands) for this insurance generally if the loan to valuation ratio (LVR) is above 80%.  
 
Well that’s not strictly true, there is a benefit: without mortgage insurance many people would get a “no” from the lender, so a “yes” with mortgage insurance is a good outcome.
 
It is easy to see why there is confusion; some lenders offer “Mortgage Protection Insurance” which is a form of life insurance and this does cover the person taking out the loan.  It is not “Mortgage Insurance” however.
 
To be clear mortgage insurance normally is payable by the mortgagor when a loan is more than 80% of the price of the property.  Why 80%? No reason really, although it is tied to perceived risk to the lender.  Each lender has its own risk rules and like everything to do with lending, its complex. Speak to your mortgage broker as they will understand the differences between lenders in this regard.
 
Why should you care, after all its just banker policy isn’t it? Mortgage insurers are more powerful than the banks.  If a mortgage insurer says no to you or your property then no amount of arguing, cajoling, reasoning will help.   Changing banks may not help either: there are only 2 mortgage insurers.
The mortgage insurers dictate who they will lend to and which postcodes they will lend in up to certain levels.  For example “standard loans” most banks mortgage insurance starts at 80%, with one bank having no mortgage insurance even up to 85%.  Inner city postcodes or “high density” postcodes will often have mortgage insurance starting at 70%.  And just to confuse matters more, mortgage insurance premium “bands” and limits change between lenders.  A little taste of what I mean:
 
  • One lender will not let any loan above $800,000 have mortgage insurance.
  • Two lenders have bands which go to $600,000 instead of $500,000 meaning a difference of $70,000 in the maximum purchase price.
 
Speak to your mortgage broker as they will understand the differences between lenders in this regard.
 
If you are trying to max out your borrowing capacity, or if you do not have a large deposit, understand it is not just the lenders, but also the mortgage insurers you need to conquer.

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Catherine Lezer

Property is Catherine Lezer’s passion. She owns nine properties of her own and has a fundamental understanding of how the property market works. 

“I’ve bought some great properties and some ‘bad’ properties, and even the bad ones have made me money,” says Catherine. “Property is the most reliable way to make money that I know!”
 
“I’ve purchased, sold, tendered, offered, negotiated, won and lost at auction, developed and renovated so I understand what happens out there in the market,” she adds. “Being able to help other people finance property is an added bonus for me.”
 
Originally from Perth and now based in Sydney, Catherine joined Smartline in 1999 with over 25 years of banking experience and qualifications include a Bachelor of Business and an MBA. Catherine has helped hundreds of clients finance houses, semis, terraces and apartments, with the majority of her business coming from word of mouth referrals.
 

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