LMI is short for Lenders Mortgage Insurance. It is an insurance premium that you generally pay when your loan exceeds 80% of your property’s value. Lenders are not comfortable lending over 80% and as such, will take out this insurance to absorb the risk of a shortfall in funds should your property not provide sufficient value to cover your loan outstanding in the event of a default. Also, for most banks, this number represents what the market regards as a safe loan to value ratio (we talk about LVR here). By lending under this %, banks feel that “secure” in “security” is satisfied by the property being mortgaged.

How do you work out if you’re borrowing above 80%? 

Firstly, we work out how much you can borrow as a whole in dollars. This is because no matter how you structure your loan(s), you can only borrow up to a maximum in dollar value what you can afford given your present financial circumstances. Then we work out how much is required to settle a purchase at a given price, taking into account your savings. If the percentage of loan you require is more than 80% of the purchase price or valuation, then LMI is required to be paid. To work this out:

1. Purchase price PLUS costs (stamp duty, land transfer, mortgage registration, legal/conveyancing) MINUS savings EQUALS loan required.
2. Loan required DIVIDE BY purchase price MULTIPLE BY 100 EQUALS LVR of loan.

If LVR of loan is more than 80% then LMI applies.

How is LMI calculated?

Depending on the LVR of your loan, the premium will vary. Premiums increase on a sliding scale. This means that the closer you approach 100% the higher the percentage of the purchase price LMI is. Because of this, if you are planning to borrow more than 80% and incur LMI, speak to us so that we can work out for you where the steps are in the scale. You could save significantly by saving a little bit more just to avoid moving up the scale from say 89% to 90.01%.

Note: LMI doesn’t just apply to purchase scenarios but all new loans taken with any bank.

Most big banks have a delegated underwriting authority, meaning that they are able to assess LMI internally up to a certain LVR. If this LVR is exceeded, then the loan has to be assessed by an external insurer. There are two main Lenders Mortgage Insurers in the market: Genworth and QBE. Usually a loan is referred externally to be assessed when LVR is more than 90%.

Is it possible to borrow 100%?

Not without a family pledge.

In fact you are likely to have to show 5% genuine savings in order to qualify for LMI if you borrow more than 90%. We cover the types of funds that can be considered as genuine savings in a future article.

Should you be opting for LMI? 

Well incurring LMI can be viewed two ways.

The first is that it is a cost to get into the market because saving harder will not out-save the market. Let’s say that the property you are wanting to purchase is $500,000 and for argument sake you don’t incur any additional costs because you are a first home buyer. You have $80,000 in the bank and require another $20,000 for a 20% deposit. This means you avoid paying LMI.

If you are able to save $20,000 in a year but the property price goes up in value to $550,000, when you have accumulated $100,000 in savings, you would then need another $10,000 for 20% of $550,000. The market has grown faster than you could save in this instance.

Paying LMI could mean that you get to enter the property market rather than having to wait another year or more. It will also mean you don’t pay higher prices in a year’s time too. It is definitely not worth delaying a major life stage such as starting a family or getting married just to save on LMI. At Liveable Loans we get that progress can sometimes come at a cost.

The second way of viewing LMI is from the investor’s return perspective. Higher LVR means less money put down on a purchase which means a higher return on investment when the property is sold. This approach requires a clear strategy and not just hot air hopes of property growth. Without a plan doing this can be risky especially if your property doesn’t grow in value. Essentially the premise of this approach is that if you put down 5% instead of 10%, your % return on investment is almost double when you sell (LMI is higher for the 5% deposit scenario so upfront costs is higher).

How do you pay for LMI?

Depending on the LVR of your loan before LMI is incurred, sometimes you can capitalise the LMI premium. This means that you can finance it into your loan. Some banks will let you borrow up to maximum base LVR of 90% and then capitalise LMI up to 95% for example. In this regard, the LMI doesn’t eat into the savings intended as the downpayment. Sometimes purchasers feel compelled to pay for LMI outright because the idea of incurring interest on a fee doesn’t make sense. The choice is up to you, up to the limits permitted by the bank.

Are there exceptions to paying LMI?

Yes, for some banks, LMI is absorbed internally for loans up to 90% LVR if the borrower happens to work for a particular profession. We discuss this in more detail in another article. Or you could just get in touch with us to see if you qualify 🙂

Does LMI actually protect you? 

No. It is a fee you pay for the benefit of borrowing more than 80%. However, should you default on your loan down the track, LMI protects the bank by paying to the bank any shortfall in funds. For every day that a loan remains unpaid, interest continues to accrue, thus LMI functions as a way for the bank to move on swiftly from a bad loan.

Yes we know, none of you ever intend for your loan to be bad but hey, unfortunate things do happen (which we will discuss in an article coming soon). There are ways to manage this.

Upon paying the bank any shortfall in funds, the insurer will generally then work out with you a plan to pay that shortfall back. As you can see from the cartoon above, LMI protects the bank but you, the borrower, pays the premium so the bank says yes to lending you more funds than it is comfortable doing normally.

Is LMI simple?

Actually, because LMI is a complex area (think about the fine print that accompanies your health insurance policy. LMI is no different), we have only covered the purchase scenario but there are more case by case scenarios that if we went into detail here, you would never reach the end of the article. In summary, the property (discussed here), the purpose and your profile (here) play a part in whether LMI is approved.

The easiest thing to do is to get in contact with us for a frank and honest discussion around your circumstances to see if LMI is applicable. We get that everyone’s circumstances are different so our aim will be to help you weigh up the pros and cons of paying LMI.

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“The Commonwealth Bank” (anyone remember that ad campaign?)

Seriously though, which bank? Is it possible for a bank to be the best at everything? Or even top 5 in all things? Most things? The things that matter?

Choosing a bank tends to feel like a big decision because it has to do with our hard earned money. Think back to when you opened your first bank account, I’m not talking about the one that your dad or mum or teacher or local banker did on your behalf, I’m talking about the one that you chose for yourself. How did you go about it? I remember when being able to choose your card colour was all the rage, for a few months there, having a pink debit card was cool. Or how about the ability to use an online savings account with a massive bonus interest rate of 1.65% on top of the standard rate for 6 months? You were raving to your friends then!

Did the colour of the card really add any monetary value to your banking experience? No, but it was cool for a short while.

Did that bonus interest rate really move the needle in terms of dollars? Well if you had $10,000 sitting in one of those accounts, it was an additional $14 a month of additional interest or thereabouts. Pretty decent.

Now you arrive at this crossroad again because it’s time to buy a property. This is the big money, where 0.1% of additional interest on a loan of $500,000 means an additional $30 a month in repayments. I don’t blame you for taking this crossroad seriously.

So you commence your research over the course of the month by surfing the web and wondering into a few branches to find out what features and rates are on offer. Pretty quickly (without the help of a trusty spreadsheet), you have more information than you can bother to process so your brain yells for help… And all that information that you curated over the course of the month, some of it might have changed since!

So you decide to give Liveable Loans a call (why not?).

Historically speaking, banks have priced their loans similar to how the Federal Government uses the tax system. Things that are encouraged are given tax breaks, until they are no longer viable to subsidise, then the costs are passed back to the “people”.

Likewise, banks will run campaigns offering low interest rates and low fees to attract borrowers. Once they have reached their quota of lending at that particular price point (interest rate), they either cease the campaign or start pricing loans at a higher interest rate to “slow things down”. The best deal very rarely stays the best deal for long.

When talking about a home or investment loan, whilst finding the best interest rate may seem important at the time because it directly impacts on how many dollars you fork out from month to month, there are other factors to consider.

For example, have you ever signed up for an internet plan only to wish you paid more because it was so damn slow and you couldn’t get out of it for 24 months? This is an example of something that is the cheapest but proves to be the most irritating due to how inflexible it is. Every one of us has had such an experience. Loans are no different, flexibility is a benefit and sometimes one worth paying a slightly higher interest rate for. We discuss this here (article soon to come).

How about that time you forgot to pay a bill because it was from a different provider as all your other services? Well there is a benefit to having your banking products in one place, we discuss it here (article soon to come).

Moving on to more complex considerations, structuring of assets can help create significant value for property investors. Whilst mortgage brokers aren’t accountants, we do work closely with many of them and have come to appreciate that with smart structuring, even if you are paying fees and average interest rates, you could still offset some costs through deductions and gain added security for your property folio (we will do an article on this with our vetted accountant network soon so stay tuned!).

On the simple but not insignificant side of things, is your own personal experience with a particular bank. If you have had a horrible experience with one and can’t ever see yourself dealing with them no matter the jazz on offer, then so be it, it’s okay, don’t let anyone make you feel silly for thinking that way. Likewise, if you are accustomed to and utterly satisfied with a particular bank’s method of banking, they’ve obviously done something right, stay on!

Finally, given the long term nature of property ownership, and by that we mean that most property buyers are likely to hold a property for more than 5 years, it is worth bearing in mind that the decision of which bank isn’t a forever one. Don’t feel like you are locked in to the first bank you choose until your loan is paid off.

If you are in the market for a home or investment loan and wish to find out which bank is a the one for you, we’d love to have a frank and honest discussion with you. The aim here to is fit the bank of choice with your current and long term plans.

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If you’ve ever been into any shop, whatever the product or service they provide, you would’ve noticed a trend:

They all sell something they claim to sell, and they all also sell something that they don’t claim to specialise in, but will sell anyways just because you are there and you are in the mood to buy. This is what we call POP (point of purchase).

The point of purchase experience includes things ranging from chocolate bars stacked meticulously by the checkout counter to sales staff required to ask whether you’d like an extended warranty provided in store on top of what the manufacturer provides. Most times, you’ll entertain the proposition but kindly decline. Other times, you’ll take them up on their offer, and be glad you did because phones are expensive to repair these days(bring back the brick Nokia’s).

Some establishments don’t like leaving things to chance, so they choose to bundle their offerings into attractive packages of things you want and things you don’t want but won’t mind having along with the thing that you do want.

But most of you are pretty savvy. Packages and deals don’t fool you. Sure a cheaper overall package with more products might seem enticing but you know, oh you know, it’s just going to be clutter, something more to think about… Good on you!

Well guess what, the basic home loan was created for you. Yes YOU.

It’s the simple loan, with one interest rate, a simple fee structure and no added bloatware. It’s for the individual who likes their cafe “no lait”, their cars stock and their greens organic only.

So what are the benefits, well for starters, that simple fee structure tends to be fee free if the bank offering it is running a campaign. More often that not, it tends to be the fee that is used to help potential customers rationalise going for the package option instead (our product piece on loan packages here).

Also basic home loans have one rate and a minimum loan amount. Once you satisfy this loan amount, you are entitled to this rate (generally a promotional rate) and product. This can be both a variable rate or a fixed rate, so if you are able to satisfy the minimum loan amounts twice because your loan is large enough, you could benefit from a loan split here without paying for a loan package (we discuss the benefits of splitting your loan here).

Thus the end result is that your need for a loan is met without the frills of the added credit cards, insurance policies and obligatory call backs for various cross-sells. The choice is yours and should you want to get an insurance policy (we recommend you be insured), then you can go to other providers.

Two downsides exist with basic home loans though.

The first is that because it is a single rate product, one rate applying to all loan balances, you don’t get the benefit of a negotiated rate, only a promotional one. Now the promotional rate may be better than the negotiated rate if a bank is trying to be aggressive during a campaign period, but if you are borrowing say a million dollars, you’ll find that you will be able to get a better rate if you opted for a loan package because of the tiered rate discounting.

The second downside is that generally, there are no offset accounts provided with basic home loans. So your repayments will come out automatically from an everyday account with the same or a different bank every repayment cycle. To reduce the amount of interest you pay, you would make additional repayments towards the loan directly, the additional funds being held in redraw which reduces the amount of interest calculated. We discuss offset accounts and redraw here.

Simple, isn’t it?

Well, if you are in the market for a home loan and would like to have a frank and honest discussion with us about which loan type would best suit you… perhaps you haven’t decided and would like to discuss the benefits of having a package rather than a bunch of products across various providers, we’d love to hear from you. You can get in contact with us below.

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At every appointment, or even at the mention that I am a mortgage broker, no matter the setting (even in a church pew. The awkward toilet cubicle hasn’t happened yet but just a matter of time I say), the question that I get asked the most is…

“What is the best interest rate?”.

Following that, the next question that gets asked tends to be…

“Which do you think is better? Fixed rate or variable rate?”

Whilst these questions may sound simple, both of them focus on the wrong thing.

The question that you should be asking is…

“Which is the best interest rate for me?”

Here’s why.

Imagine you were offered a chance to buy something you love. When you ask about the price, you are told today’s price, but you are also told that tomorrow the price might go down. Actually it might go up. No wait, down. Up? That’s pretty nerve wrecking.

Additionally, what if you could buy that same thing at a guaranteed price that you like, but were also told that if you wait there is a chance you could buy it at a price that you love, but there is no guarantee?

What we are talking about here is the need for certainty. And we all have it.

When we seek out the best interest rate, part of us wants to know that we are getting a good deal. More so though, we want to know with certainty that the loan we take will fit in with the rest of our well laid plans. These plans could include a holiday after settlement or an upcoming wedding or the savings buffer we rely on to tell us that our finances are OK.

Just as buying something we want but don’t need at a very low price can lead to us feeling buyer’s remorse when we can’t afford to buy something we really need in the future, the same can be said about a loan that is badly structured that doesn’t fit in with our day to day plans.

Recognising that the interest rate is but a feature of a multi-featured loan product also helps to better appreciate why rates are the way they are.

As such, when it comes down to it, it isn’t the best interest rate that we are after but rather, the loan product that best fits in with our current and future lifestyles.

Sorry folks, Interest Rate Man isn’t a thing. Although, the variable vs fixed debate can be navigated though by exploring a loan split. We wrote an article on it here

If you are considering what interest rate is best for you and would like to have a frank and honest discussion with us, please get in contact with us below. We will discuss options such as splitting your loan and the pros and cons of variable and fixed rates as they apply to your circumstances.

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Buying an apartment can be a great idea. The benefits are plentiful.

Low maintenance living. No garden. And no garden. Did I say no garden?

Lower overall cost of living too because you have less things and by association, less clutter (for some of you this is the real appeal. Even if you could afford to buy a bigger house, you’d still opt for the cosy apartment because you swear clutter and mess intentionally plot to increase your daily stress levels).

Your “house” heats up and cools down quickly.

It is safer because, unlike a fully detached house, no one can get to you without fancy key fob access to your floor (so if something fishy does happen, it’d be like a game of Cluedo).

Free gym, walking distance to hipster foodrinkeries, the list goes on.

I live in a four bedroom house because it suits my family’s needs. Yet on several occasions, I have been caught saying, “Oh how nice would it be to just live in an apartment”. This tends to coincide with “can we just use disposable plates?”

Oh, and they are generally more affordable than landed houses in the same suburb. This makes it a great way of getting into the property market, a market that seems to keep getting more and more un-enterable, the longer you wait.

Thinking about living in an apartment is easy and pleasant. The process of obtaining finance to purchase one, however, isn’t as simple as buying a landed house.

Here’s why:

The ratio of land to building is significantly less than a landed house. Where a landed house is likely to derive more of it’s value from the land compared to the dwelling on it, an apartment’s value is derived more from the dwelling than the land itself. Because land generally appreciates and buildings depreciate, banks are generally more picky when it comes to financing apartments, especially smaller ones.

How small is small?

You’ve probably heard “50 square metres” be thrown around a lot and in general, that tends to be the sweet spot above which banks are happy to finance but below which they will decline to finance. Most apartments with 2 bedrooms or more will exceed this but do read on.

When looking into the details of what banks consider to be part of the eligible surface area, some banks will consider your balcony as part of the eligible minimum surface area whilst others won’t. Most won’t consider your car space and storage locker too.

Also just because a bank will lend you money to purchase an apartment because you satisfy the minimum surface area doesn’t mean that they will lend you the 80% or 90% of the purchase price that you require. In some cases, banks will only lend up to 60% because they just don’t want anymore apartments.

In some cities there are restricted postcodes due to the high density of apartments within that postcode. Where you purchase in a restricted postcode, you will find that banks will impose a hard cap on the % of the purchase price they will lend you. This could come as a surprise to you if at the time you purchased the apartment the % loan you could obtain was 80% but suddenly at settlement it dropped to 70%! If you require LMI but the insurer doesn’t want to approve your application due to overexposure, you may not be able to get finance altogether. We discuss this more here.

The flip side of restricted financing is that even if you are successful at obtaining finance at settlement, what happens in 5 years time if you decide you want to sell the apartment for something bigger? After all, wasn’t the apartment a stepping stone to a bigger more suitable family home? If you are in a high density apartment, chances are, in 5 years time, it will be even higher density with newer developments popping up around yours. Finance restrictions will mean that potential buyers will struggle to buy your apartment because of their difficulty in obtaining finance.

Now if you do decide to buy off the plan, it could be a couple of years from the date of your purchase to the date of your settlement. Sure you stand to benefit from stamp duty concessions if you are buying to live in and lower stamp duty due to buying in at an earlier release stage. During that time, bank policies may change. If the policies tighten further because fundamentally, apartments don’t grow in value as strongly as landed houses, you could find yourself having to shell out more money because banks won’t lend you as much or your apartment may not be worth the amount you paid a couple years ago! This is a valuation risk and shortfalls in valuation aren’t unheard of.

So, what does this mean for you?

In considering the lifestyle benefits of owning an apartment, whilst living in it could be the dream, purchasing one requires more planning than buying a landed house. The contingencies and changes to bank policy mean that you need to be prepared more so now than ever. The aim of this article was to help you realise that planning is key to making any financial decision. Apartments may be perceivably “smaller” investments because they are cheaper than a detached house. Yet the consequences of not planning for them can be quite adverse.

You saved hard to get into the market, be sure to see it well spent. Then you can look forward to every evening, cup of tea in hand, taking in the fresh breeze from your very own 7th floor balcony.

If you are looking to purchase an apartment and would like to have a frank and honest discussion with us about how your different contingencies will play out, do get in contact with us. We’ve helped many purchasers successfully buy apartments and would love to guide you through this buying process.

Also if you enjoyed this article and reckon it would be beneficial to someone you know, please share it with them. It will earn you many friendship points and help us grow this blog into a resource that will help many. Thank you.

So you’ve decided to get a loan.

During your commute to work, you open your favourite internet browser and start searching for the best interest rates available. In an instant, you are presented with a smorgasbord of ads for various interest rates from various loan providers. They range from banks that you have heard of to some niche brands that you are only coming across for the first time.

After checking out what your bank, the bank you bank with, has to offer, you decide to go to a comparison website and sort the results from cheapest to most expensive.

This begs the question, apart from the cheapest 3 loan providers, why do the others even bother listing their offerings online at all? Who voluntarily clicks at first instance on the bank that is not the cheapest?

Sure there are considerations of “big bank vs small bank” and fees in addition to the rate being advertised but why do the rates differ at all in the first place?

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To understand this, it is worth noting that the interest rate charged for money is the price tag to borrow or use the money that the loan provider holds for a set period of time.

What this means is that whilst there is a supply of money and a demand for money, thus the existence of a money market, the suppliers still get to say who they wish to lend money to and why.

For example, there are loan providers who will only lend money to borrowers who have squeaky clean credit records. This is because these loan providers are risk averse and prefer borrowers who reflect this low level of risk. There is also a good chance that the interest rate offered to these borrowers will be lower.

Also there are loan providers who will lend money to borrowers who have had bad credit performance in the past, also known as bad credit history. The interest rate charged is risk loaded, meaning they are higher depending on how bad the borrower’s bad credit history is.

In theory, this makes sense… so far.

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To make things a little more complex, loan providers are also businesses and as such, make money from the interest earned on loans. If they are also deposit taking institutions, such as banks, where they pay interest to customers for money deposited with them, then the profit they make is the spread between the higher loan interest rate they charge and the relatively lower savings interest rate they pay out.

If the loan provider doesn’t take deposits but only lends money out, their profits are the interest earned less the cost of running the business such as overheads and regulatory fees. These providers tend to be smaller, have no physical branches, and service potential borrowers via online platforms. It is also likely that their policies will be very black and white, meaning that if you are a borrower with a complicated scenario, there is a high chance your application will be declined here.

Fixed vs Variable, that’s another topic which we discuss here

How should you approach interest rates, we discuss it here

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Putting it all together, understand that interest rates are determined by the risk the borrower presents to the lender and also the profitability of that interest rate in the grand scheme of the lender’s business. Getting a better idea about this can be hard when online searches only present you with a plethora of rates without any explanation for why they are the way they are.

To get a better idea, consider having a frank and honest discussion with us as our experience allows us to inform you on how good a deal really is, whether a deal actually applies to you, and also if you will actually enjoy your experience with a non-mainstream lender.

Also, if you reckon this article would be beneficial to someone you know, please share it with them. It will earn you many friendship points and help us grow this blog into a resource that will help many. Thank you.

Planning a family can be a long drawn out process. Not because we intend for it to be a drawn out process. Rather there are so many things to consider. There’s the decision of which hospital to deliver your baby, whether breast is really best, how your month to month budget will look like once one of your incomes stops, who will help you look after Bubby if you need a break… the list is endless. And that is okay, because you are about to embark on a beautiful journey, one which you want to do well. Hey, this isn’t just what first time parents go through, even repeat parents consider the same set of factors each time around. They may have a better idea of what to expect, but every child is different, and part of being open minded is, that you have to consider everything.

Conceiving itself isn’t guaranteed. Many couples try multiple times, over several years even without succeeding. Each of us knows someone who has been through this journey and know that it can be very disheartening. If you are going through this right now, we know how hard this can be and are cheering you on in the hope that you will see your dream of parenthood come to fruition.

If you have conceived (CONGRATULATIONS), we celebrate with you and hope that now till delivery, everything goes smoothly.

Part of planning a family is making a home. Sometimes, because of how the process of conceiving can play out, looking for a home can either be put on hold or be brought forward suddenly. If you require financing for your home, planning for it can be difficult when only God knows when you will successfully conceive.

If you are in the process of trying, chances are, you aren’t thinking about whether you’ll be able to get a loan for your home. If you have already conceived and need to find a new home, you might be wondering if you’ll be able to get a loan at all given one of your incomes is going to stop in a few months time.

Well, you might be glad to know that the banks have actually thought this through.

Whilst most banks are conservative and don’t like lending money to couples going through pregnancy and maternity leave, some banks have given this some serious thought and come up with ways to justify helping you along during this life stage.

For example, if you are able to show that you will be resuming work once your maternity leave is over, it would make sense that a bank have some confidence in lending you funds.

Also, if you are able to show that you have sufficient savings to make your mortgage repayments in between when your pay stops and when your work resumes, shouldn’t you at least be considered for a loan?

Well that’s how the banks who say “Yes!” think.

Planning a family is a big process, and it should be an enjoyable journey.

So fret not.

If you are planning to start a family or are currently on maternity leave and would like to know how you could enter the property market, we would love to have a frank and honest discussion with you on how you could potentially make your next home a reality.

Also if you enjoyed this article and reckon it would be beneficial to someone you know, please share it with them. It will earn you many friendship points and also help us grow this blog into a resource that will help many. Thank you.