Insurance

You are here: ninemsn > Money > Insurance

Understanding your mortgage insurance

From Money Magazine, May 2003

Next time you take out a mortgage, make sure you check the fine detail about insurance covering the lender. It could be well worth it. Effie Zahos reports.

On any given month you can expect up to 14,000 households throughout Australia to refinance their mortgages. Chances are they’ve secured themselves a better deal, but for those who borrowed more than 80% there is a strong possibility they’ve overlooked a small bonus.

In brief

• Depending on the institution, lender’s mortgage insurance premiums are refundable if you pay out your loan or refinance within the first two years. It’s a little-known bonus because borrowers are rarely told about it.
  
  
• Lender’s mortgage insurance (LMI) is a one-off insurance premium charged when a borrower exceeds a lending valuation ratio (LVR) of 80%. That is, they borrow more than 80% of the purchase price.
  
  
• Even though the borrower pays the bill, the insurance offers no protection whatsoever to the homeowner. It’s a contract between the lender and the insurer that should the borrower default or a shortfall arise following a mortgagee sale, then the mortgage insurer will pay the lender the difference.

What the experts say

Lending services manager Tim Donahoo, of Mortgage Choice, Australia’s largest mortgage broker, says it’s hard enough for borrowers to understand mortgage insurance, let alone know how premiums are calculated and whether or not they are rebated. “Most people are aware that they can borrow up to 95% but they still don’t understand the concept of mortgage insurance,” says Donahoo.

For the complete story see Money Magazine's May 2003 issue. Subscribe now.