The cost of lenders mortgage insurance can strip out equity from your property investments and, for some, makes the cost of buying prohibitive. Fortunately, for specialist borrowers such as financial advisers there are some alternatives.
When buying an investment property, additional costs such as lenders mortgage insurance (LMI) can reduce the equity in your property. For typical borrowers, most lenders make LMI mandatory for mortgages which exceed an 80% loan to value ratio (LVR).
LMI is an insurance policy taken out by the borrower which covers the lender against the borrower defaulting on their loan repayments. LMI is not provided by banks but by insurance companies, and in Australia there are only a handful of providers.
On the positive side, LMI helped to insulate the Australian market from the property and leverage related issues that affected many western countries during the GFC.
However, arguably the greatest negative effect of LMI is the additional cost it adds to property transactions for borrowers who do not have a 20% deposit. With property prices on the rise, this can make buying property unattainable for many.
What are the alternatives to LMI?
Fortunately, for some borrowers including financial advisers, there are alternatives.
Specialist lenders such as Investec invest time to understand the income and spending behaviour of niche client groups, such as financial planners, medical professional and accountants. This allows lenders to develop a degree of comfort around these transactions, which ultimately results in being able to provide more flexible solutions to clients.
Currently there are two ways in which this type of borrowing is offered to clients, depending on their required level of borrowing. For certain clients, if the extra amount is typically between an 80% and 90% LVR, some lenders will increase the limit without the imposition of LMI or altering any of the main loan terms. However, this is only available to a very small proportion of clients.
Another option is a mortgage structured into two components with two different providers. The first component is a typical mortgage structure and covers the debt up to the 80% LVR at market rates. A second mortgage covers the borrowing from the 80% LVR level to the required amount, typically around 90% to 95%. The second mortgage has a different structure, generally a higher interest rate and shorter loan term, designed to encourage aggressive repayment. However the expense incurred should not exceed the cost of LMI.
While the above solution may not be available to all borrowers, it will work for certain clients who can meet the servicing and eligibility requirements and may provide a far more attractive option than the expense of the LMI policy.
As Head of Adviser Services at Investec, Gareth’s role is to develop a deep understanding of the adviser market and deliver a range of bespoke products and services that help advisers achieve their personal and business goals.
