Lenders Mortgage Insurance: What is it and why did they decline my non-resident home loan?
This article explains what Lenders Mortgage Insurance (‘LMI’) is. The article then provides information on when a home loan can be approved greater than 80% LVR (ie, with LMI approval).
What is Lenders Mortgage Insurance?
Lenders mortgage insurance is insurance that protects the bank in the event of buyer default. The easiest way to explain it is to compare it to a person insuring their car. In the event of an accident or theft the insurance company will pay out the car owner to either fix the car or buy a new car. LMI is similar in that it pays out the bank should the borrower default on the mortgage and the bank makes a loss.
Are all home loans mortgage insured?
No. As a generally rule only loans that are greater than 80% LVR (‘Loan to Value Ratio) are mortgage insured. A borrower with a 20% deposit plus costs would not be required to pay the banks LMI premium.
What does LMI cost?
LMI is there to protect the bank in the event of default, not the borrower. Borrowers should take out their own personal life and income protection to protect themselves.
Even though LMI protects the bank, the borrower actually pays the premium. The premium will vary depending on the LVR and loan amount. For example, the LMI premium will be cheaper for an applicant with a bigger deposit as there is less risk. The higher the loan amount as well will result in a higher premium payable. As a rough guide LMI is between 1-2% of the purchase price for a 90% LVR but premiums vary significantly between different lenders and mortgage insurers.
Why did the Lenders Mortgage Insurer Decline my Non-Resident application?
Lenders Mortgage Insurers do not like non-residents. Non-residents being Australians living and working overseas or foreign citizens living and working in Australia, are considered high risk by LMI. The concern is that Temporary residents in Australia might leave the country and go home without paying the mortgage, while expats abroad may decide not to pay the mortgage and not come home. LMI is also concerned about the global economy, exchange rate fluctuations and so on which adds an extra layer of risk to the mortgage.
What does this mean to my non-resident mortgage application?
The fact that LMI will generally not insure a home loan from a non-resident, will mean that a temporary resident or Australian citizen living overseas will be declined a home loan because LMI will refuse to insure. As such, to be approved a non-resident will generally require a 20% deposit plus costs. For many borrowers this is simply not achievable
My Non-Resident Home Loan Application was Declined by LMI. 2 Tips to get it approved
Whilst most Lenders Mortgage Insurers will not approve the loan there are some lenders who have a special arrangement with the LMI and can approve applications to 95% LVR, requiring only a 5% deposit, when;
1) The temporary resident is purchasing with an Australian citizen or permanent resident. If one party to the application is an Australian citizen or permanent resident and the other applicant is a temporary resident on a working visa such as a 457 visa, spouse visa etc, then a mortgage to 95% is possible.
2) For Australian expats living abroad, some lenders will approve a mortgage to 95% LVR providing application is strong with genuine savings, clean credit history and strong employment.
If your non-resident home loan was declined by LMI you can still be approved if you satisfy the above.