85 percent loans with no lenders mortgage insurance (LMI)
I have had a lot of enquiries about this lately so I thought I would write about who’s offering this, what the benefits and pitfalls are and what the general lending guidelines are.
Which lenders are offering 85% with no mortgage insurance?
STOP THE PRESS!
- Westpac have suspended their 85% no LMI policy (May 2011).
- ING are no longer offering their Reduced Equity Fee or REF waiver (August 2011) for loans between 80% and 85% LVR. ING are also dropping their flat fee structure on loans up to 85% LVR. These loans will now be incur a fee similar to mortgage insurance although the REF fee can still be a little less expensive than traditional LMI (August 2011).
This means there is now only one mainstream lender offering 85% no LMI loans. Citibank.
They have quite a long list of policy restrictions and requirements. In practice this policy is only available for purchases of standard metropolitan security. There is also a 0.20% pa loading on the interest rate if you opt for interest only repayments. Please contact me to see if you qualify for an 85% no LMI loan.
Benefits of 85% no LMI loans
The best way to illustrate this would be with an example:
Say you are looking to purchase a home for $900,000. You have a 15% deposit plus funds to cover stamp duty and other costs i.e. just enough deposit to get you to an 85% loan of $765,000. Normally lenders mortgage insurance would be in the vicinity of $11,000 in this scenario.
So you can see the benefit is a potential saving of $11,000!
Pitfalls of 85% no LMI loans
For investors an issue can arise when you want to access equity in your property in the future. Often it is quite useful to have paid mortgage insurance previously on your loans that way you are only required to pay top up mortgage insurance when applying to access your equity via a new loan. For example say you borrowed 90% to purchase a property 5 years ago and the property has subsequently gone up in value by 25%. As you have paid insurance (LMI) before you should be able to extend the loan on that property back up to 90% of its current value and only pay LMI on the top up amount. You can then use those funds for the deposit on your next purchase. If you had initially borrowed 85% with no mortgage insurance and then subsequently you wanted to access your equity by borrowing up to the 90% as in the above example you would be looking at paying LMI on the entire loan amount secured by your property not just the top up amount. As the property has gone up in value in this example the LMI on the whole loan exposure against the property would be more than the original amount of LMI paid and the top up LMI paid. It’s one of the quirks in LMI calculations.
The other issue for investors apart from the above example is the temptation to put too much deposit into the purchase thus restricting further acquisitions or leaving no buffer.
The final word on 85% home loans with no mortgage insurance
A potential saving of $5000 or $10,000 in the hand now is hard to argue with. If you are about to buy a property and are looking to borrow 80% - 85% of the value of the property it is definitely worth exploring if an 85% no mortgage insurance loan is available to you.
If you are not sure what some of the terms used in this post mean please check out our Jargon page.
Can't quite make an 85% loan, check out our 95% home loans & 90% home loan pages.