Switching loans? Paying $700 in exit fees is nothing compared to the cost of lenders mortgage insurance, which runs into the thousands.
While the government is pushing ahead with its ban on exit fees to help borrowers shop around for better rates, many argue the real barrier to refinancing is “double dipping” by mortgage insurers.
If you’re borrowing more than 80% of the value of a property, you will have to pay lenders mortgage insurance, or LMI, which protects the lender in the event that you default on the loan and the outstanding value of the loan is greater than what they will receive from selling the property.
The cost of LMI is determined by the loan to value ratio (LVR), the size and type of loan and your credit score. For instance, borrowing $450,000 on a $500,000 property could cost you $8,815 in LMI – a cost which is paid upfront.
While most allow LMI is a reasonable charge considering the risk a lender takes in loaning more than 80% of the property value, many find fault with the inability to transfer LMI should you decide to switch loans – therefore creating a barrier to refinancing.
In some cases, but not all, borrowers looking to refinance will be forced pay the LMI premium twice. So even though the lender you originally placed your loan with is no longer at risk should you default, the lender that you refinance with is not covered and could require you to pay LMI again.
Some argue that this is a case of mortgage insurers getting two bites of the cherry, and that borrowers should be able to transfer their LMI to the new lender when they refinance.
While it is possible to get a rebate on your LMI when you terminate your policy – it’s important to note that it’s up to you to ask your provider for the return.
According to Finance Brokers Association of Australia president Peter White, LMI is an insurance product and as a result you should get a proportional rebate when it’s terminated. However, if you don’t ask for it, you won’t get it. He adds that most would be lucky to get 40%.
Most LMI policies will not extend a rebate to borrowers after 12 or 24 months, a practice that White says should change, as the lender has the right to claim on the policy for the entire life of the mortgage.
The Insurance Council of Australia has stated that LMI is not a barrier to refinancing, as it is not always required by an incoming lender. If the new lender does require LMI, then an additional premium is payable and the LMI provider is required by regulation to set aside new capital for that loan.