TPC Gold | Lenders Mortgage Insurance (LMI): What It Is and When You Need It

In today’s bonus episode, Bryce and Ben dive into a listener’s question about the mechanics of lenders mortgage insurance (LMI).  

Find out what LMI is and how it relates to your loan-to-value ratio (LVR), as well as whether the premiums are refundable or transferable.  

Ben shares his frustration with the system but also explains how, in some cases, paying LMI can be a strategic move to unlocking more property investment opportunities.  

Tune in to hear their insights on whether you should embrace or avoid lenders mortgage insurance (LMI)! 

For the full Q&A episode, tune in here: Episode 97 | Q&A – Mechanics of LMI, Purchasing Foreclosed Property, Stretching Your Investing Budget and more 

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Did You Enjoy Learning More About Lenders Mortgage Insurance (LMI)?

If you have further queries about your mortgage or want to have it reviewed, book in a free initial consultation with our sister company Empower Wealth. 

Have a burning question of your own?  

We’d love to hear from you! If your question is answered, you’ll get our premium Start & Build course (RRP $497) for FREE! 

 

If You Enjoyed TPC Gold | Lenders Mortgage Insurance (LMI): What It Is and When You Need It, You Might Also Like:

• Ep 190 | Q&A – Addressing Media Alarmists, Investing in Your 50s and The Truth About Lenders Mortgage Insurance 
• Ep 417 | Home Deposits Made Simple – Chat with Julia Hartman, Michael Ragavan & James Bowe!  
• Ep 436 | Warning! Don’t Fall For THESE Mortgage Myths 

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Transcript

Bryce Holdaway
So there you go listeners, we don’t really prep, we just come in here and riff it, but we’re very fortunate to get lots of really cool questions.  

Ben Kingsley
What are we doing?  

Bryce Holdaway
I’ve got a question from Volkswagen.  

Ben Kingsley
Bang, straight into it.  

Bryce Holdaway
Volkswagen.  

Ben Kingsley
Volkswagen.  

Bryce Holdaway
On Facebook. “Good afternoon gents, thanks for the gold that you provide. It’s both educational and inspiring. I enjoy listening to your show on my commute to and from work each day. And now that I’m fully up to date with your shows, I enjoy the footy banter, so keep it coming.” Mate, we gotta wait for footy season. 

Ben Kingsley
I know, bring it on!  

Bryce Holdaway
“I have a quick question. How would you tackle this situation? I’m 33 years old and married with two young kids with plans for number three in the future.” 

Ben Kingsley
Well, there’s one way to do it…probably invest in property and not have that third kid. Just kidding of course, children are beautiful.  

Bryce Holdaway
We’re not the family planning podcast. “I’m currently rentvesting. I have subsidized housing thanks to my career, with one investment property in Warner, north of Brisbane. (I bought this before I started to listen to your podcast). I bought off the plan and in hindsight now, armed with the information provided by your podcast and other books on investment property, I would have steered away from that investment and bought based on location. Hopefully this property will do some heavy lifting in the future.”  

Ben Kingsley
Maybe.  

Bryce Holdaway
“My question is in reference to LMI and LVR.” LMI of course is lenders mortgage insurance and LVR is loan-to-valuation ratio. “Is the LMI attached to a loan dissipated over time as your LVR approaches the 80% sweet spot or does it remain until the whole loan is paid off? And given I’ve saved up a good cash reserve, would it make sense to pay just enough to make my LVR 80%? Thanks again for your time.” Really good question about the mechanics of lenders mortgage insurance.  

Ben Kingsley
Okay, so we’ll start from the top. What is lenders mortgage insurance? Lenders mortgage insurance is an insurance policy that the banks take out against you in the event that you don’t repay them their money.  

So if you think about it in a comical sense, the insurance has knocked on the bank store one day and said, “I know you only lend to 80%, but how about we put something together, a JV together where you lend up to 90% (and in some cases back in the old days) 100% of the value of the property, and we’ll insure the risk of you doing that…but guess what, we’ll make the borrower pay for it, okay.”  

And so in some cases you can capitalise that insurance premium, which means you can add it to the loan and in other cases, depending on some lending criteria, it might cap out at say 90% or 95%. It’s very hard to get 100% lending. There are some house-and-land package companies that work in with the banks to do 100% lending, but it’s unusual. Alright, so that’s the concept. Now, so it doesn’t protect you as the borrower.  

Bryce Holdaway
What?! Come on…

Ben Kingsley
It doesn’t protect you as the borrower. It only protects the bank, but they get you to pay it. So that’s the sneakiness of it. In fact, I’m a bit angry about the amount of lenders mortgage insurance that gets paid out there because I think it is absolutely money for jam for these insurance companies.  

Bryce Holdaway
Yeah, let’s get all of our listeners to…we’ll pool our money so we can all go to capital base. Then we can become the third LMI provider in the country. 

Ben Kingsley
Wouldn’t that be good?  

Bryce Holdaway
Yeah, because you sit in the back room counting checks, don’t you?  

Ben Kingsley
Postcode protect it, and you’d knock back certain types of properties and you’d be…yeah, anyway, we’re not here to make money that way, but all right. Now the question you’re asking is how long does the premium last for? Well, this is what the insurers argue, that the premium is for the life of that loan. Okay, so it means that for the 30 years you’re protected…but you make a great point Volkswagen, in terms of coming back to when your value of your property grows beyond the loan-to-value ratio of 80%, then technically there’s really nothing that they’re insuring.

They can almost go to the bank with that cash. So that is where it becomes really frustrating because unlike car insurance and house insurance premiums, if you do choose to change lenders in terms of refinancing your car loan or whatever, you get a rebate. But these lenders mortgage insurers do not give a rebate. And it’s non-transferable, Bryce, and now I’m getting angry.  

Bryce Holdaway
You’ve got your angry voice on.  

Ben Kingsley
I’ve got my angry voice on because it should be transferable and there should be a rebate. It’s bulldust. Call it bulldust. There you go.  

Bryce Holdaway
It is a moment in time, isn’t it Ben? You’re paying a premium in a moment in time, and therefore, as you said, there’s no money back at any point. There’s no pro rata-ing. You’ve paid it, move on. So the LVR becomes irrelevant after that moment in time.  

Ben Kingsley
Correct. So let’s say you buy a 95% LVR, okay, and you pay your lenders mortgage insurance, and then you see a bank who’s got a better deal. Well, if you want to refinance them and let’s say your LVR (loan to value ratio) is 85%…which LVR is basically measured by the loan amount divided by the value of the property as a percentage. So that’s the loan amount divided by the value of property, just repeating that, just so you got that right.  

Bryce Holdaway
So a loan of $800,000 against a property worth $1,000,000 (is) 80%.  

Ben Kingsley
Correct. Okay. So the reality here is if I then say, okay, I want to refinance to another lender, but I’ve got to pay a brand new premium and I don’t get a rebate on the old premium that I’ve paid…it’s a rort. I’m calling it, it’s a rort.  

Bryce Holdaway
It’s a privilege. We just get the opportunity to pay it twice, mate. If we want to revalue it to a better opportunity, we get to pay it twice. 

Ben Kingsley
Well then obviously then you think the interest rate’s better, but ultimately once you put them all together, no, you may not be better off financially. Now one good thing about lenders mortgage insurance, and it’s got nothing to do with the insurance companies or the banks, but the ATO does recognise it as tax deductible. So effectively you can claim the lenders mortgage insurance premium over five years. So it can be written off over five years as a tax deduction.  

Bryce Holdaway
Subject to your accountant’s advice.  

Ben Kingsley
Yes, well I think that is tax policy so I don’t think we need to go there but you’re right, you’re right. We’ll protect ourselves.  

Bryce Holdaway
Exactly, so there you go, Volkswagen.  

Ben Kingsley
Volkswagen. Do you have a diesel or do you have a petrol? You might be able to get your money back on your Volkswagen.  

Bryce Holdaway
They might get a rebate there. “And given I’ve saved up a good cash reserve would it make sense to pay just enough to make my LVR 80%.” I’ve got a rule on mortgage insurance. Most people say to me…  

Ben Kingsley
Listen to this because it’s gold.  

Bryce Holdaway
We’ve said it before on the podcast: embrace it when you have to, avoid it when you can. And embrace it when you have to is largely if it means that you can control a better quality asset and the benefit outweighs the cost. Lock and load. Knock yourself out.  

Ben Kingsley
Case in point, we’re going back probably to 2010. I was able to release $110,000 by paying I think it cost me $8,000. So it cost me $8,000 to get access to $110,000. Now I still need to service all the loans and so forth, so I might not have had the equity in that property, but I thought what an opportunity this is in terms of my gearing. Obviously I’m in the accumulation phase of building out my portfolio, so at that time I’ve gone: that $110,000 could form a deposit for another property that I could buy, and so it made sense for me playing the long game to embrace it.  

Bryce Holdaway
Mate, love it. There you go, Volkswagen. Two very good concepts there, LMI and LVR. Very, very good.