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What is Mortgage Insurance?

August 21, 2011 By Leave a Comment

Today I am going to write a quick section with the intent of dispelling the fallacy that many people have about lenders mortgage insurance.

You may have heard the term Lenders Mortgage Insurance (LMI) or even paid it yourself when taking out a loan at one stage or another – but do you actually know what it is?

So what is it you ask?

LMI is a form of insurance you pay (a one time fee) to a lender ( in addition to the loan amount you are applying for). Whilst it is not a legal requirement, it is a requirement of most lenders if you are borrowing greater than 80% of the value of your residential property. The price is generally higher the higher your Loan to Value (LVR) is.

So who does it insure?

LMI insures the lender. One common misconception is that it covers ’you’ the borrower in case you default, which is untrue. It is actually a form of insurance for the “lender” to cover the higher risk of lending you are requesting. Essentially it is the lender charging you a premium for them to minimise their exposure to lending at such leverage.

Whilst this may sound like a bad thing – for the most part it isn’t. LMI can allow you to buy that property you were after sooner, and with less of a deposit than you thought possible. Yes it can cost a bit more upfront (unless you capitalise the LMI onto the loan) – but it is a fact of lending in todays market, and you just have to realize the additional costs if you are looking to borrow over 80% from one of Australia’s lenders.

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Fixed rates on the down low

August 21, 2011 By Leave a Comment

In the last 2 weeks all major banks cut their fixed rates on standard lending products quite significantly (some by up to 0.6%!). This means the fixed rates on average are now lower than the discounted variable rates. Variable rates move up or down dependant on the RBA’s official cash rate.

What does this mean for us Tom and Jane buyers and investors?

Whilst variable rates are generally the most favourably utilised amongst borrowers, this is certainly a possible opportunity for those of you who wish to have some certainty on your repayments. There are a number of ways you can structure your loans and I do advocate fixed term options for the risk adverse investor.

For others, this could be a sign that the cash rate is expected to drop over the coming 3-18 months – which means the variable rate will drop alongside.

Regardless of your school of thought, I believe the RBA will wait until they witness some clarity in the local market and form an opinion on our own inflation expectations.

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Will they or won’t they? An Interest Rate Story

August 21, 2011 By Leave a Comment

Unless you have been stuck under the covers the last couple of weeks, you would have seen the media frenzy surrounding the financial markets roller coaster that has hit both the local and international market.

This in turn has led to a lot of speculation on whether the RBA “will or won’t” drop the cash rate in their next meeting to counter the confidence levels in the industry at the moment (they next on 5th September). As many know, any drop in the cash rate generally means lenders passing on the discounted rate to a consumer (which is what every property owner wants!).

I do find it quite interesting considering just a couple of months back, a lot of analysts estimated several rate hikes by the end of the year – but I guess that’s the whole nature of guestimates.

Based on the current market, I do think it’s fair to say there won’t be any rate hikes in the short-mid term – or as many economists believe in the foreseeable future.

Regardless, you can form your own opinion – but my advice is to keep at paying off your existing mortgages and working to build your investment portfolio as best you know how. There is nothing you can do to control the market anyway, but you certainly can manage your own portfolio for long term growth.

Filed Under: Latest Home Loan News Tagged With: , , , , , ,