You’re looking for the house of your dreams or maybe you’ve already found it. It’s an exciting time but it can be daunting when it comes to arranging finance and meeting all the upfront and ongoing costs, such as lender’s mortgage insurance.
How lender’s mortgage insurance works
When it comes to arranging a home loan, if you have a deposit equal to 20% of a property’s value, you will generally not be asked to pay the costs of lender’s mortgage insurance.
But if a lender agrees to lend more than 80% of a property’s value there is the risk that—if the loan isn’t repaid as agreed—the lender will lose money.
That’s where the lender can benefit from lender’s mortgage insurance.
Lenders arrange the insurance to provide another way of retrieving the money if the need arises—that is, the insurance company can reimburse the lender.
In a nutshell, lender’s mortgage insurance is a one-off cost. The lender will generally buy the insurance and then pass the costs on to the borrower—these are usually added to your home loan which means you’ll end up paying the costs as well as interest on top.
The pros and cons
On the positive side, lender’s mortgage insurance may mean you are able to buy your home sooner if you have less than 20% deposit.
But that means you’d be borrowing more, so you'll be paying more in interest over the life of your home loan and the lender’s mortgage insurance costs.
Another way you could avoid the costs of lender’s mortgage insurance is if someone acts as a guarantor for your home loan.
Guarantors generally need to be immediate family members. The property to be purchased acts as partial security for the lender and the equity in a guarantor’s property provides additional security.
Obviously, there are risks in having someone act as a guarantor on your home loan, especially for the guarantor.
The guarantor needs to make sure the property being purchased is a valid investment because they may have to repay the loan if you don’t—as a result, their own property and credit rating could be put at risk. Find out more at the MoneySmart website.
And by tying up the equity in their own home, the guarantor may not be able to use it if they need to.
It’s important that a family member knows all that’s involved in being guarantor and seeks legal and financial advice before acting as a third party on your loan. And you’d need to consider how your relationship could be affected if things don’t go to plan.
The right home loan
Finding the right home loan can be as important as finding the right home. When looking around, consider the different types of loans available and find a lender who’s interested in helping you repay your loan sooner so you’ll pay less interest.