If funder pays LMI is it added to loan?

[JohnAJones]

Funder pays LMI, borrower pays higher interest as compensation.

Is the LMI added to the loan amount (the principle)
OR
the higher interest paid is in effect the LMI payment?

John

 

[Kristine..]

Hi John

You have asked a number of questions here:

Essentially, if the loan is required to be insured, the borrower pays the insurance premium, or risk fee.

The borrower may choose to pay the fee separately, or the lender may lend the money to the borrower for that purpose.

If the lender lends an amount equivalent to the risk fee to the borrower, then that amount would usually be added to the loan although would not usually be taken into account for serviceability purposes.

Some specific loan products exist for which products the lender pays the risk fee, however these products usually carry a slightly higher interest rate (or perhaps less of a discounted rate) than products where the risk fee is calculated separately.

Does that answer your questions?

Cheers

Kristine

 

[FelixL]

Yes, they will either buy LMI straight away, or securitise the loan via residential mortgage backed security soon after. Either way that cost comes from the higher interest rate the borrower pays

 

[Kristine..]

Hi Felix

Perhaps you could explain what you mean by 'securitise' the loan?

All residential borrowing is secured by registered mortgage against the residential property offered as security by the borrower, so I am not sure what you are referring to in your response.

Of course, the borrower may offer another property as security and not just the property being purchased (if that is the case for example where a borrower is, say, buying a commercial property but offering a residential property as security for the loan) but a mortgage is an instrument registered against property, it is not the loan itself.

Ergo, there is no direct correlation between loans and interest rates. It depends on the circumstances and the lender, it is not just a 'matter of course'.

Cheers

Kristine

 

[FelixL]

Securitization is when the lender sells a batch of their loan portfolio back on the money market. The reason is that lenders are required by law to keep a certain percentage of capital at hand for each loan. If they sell the loan to someone with even higher financial rating (usually the buyer will be AA+ rating organisations such as mortgage insurer, govt agencies etc), they can release that capital and so more money for lending. Since these loans have residential real estate as the security, they are called Residential Mortgage Backed Secuiritization (RMBS).

 

[JohnAJones]

Thanks but...

So in non rocket science lingo:

If the other guy pays the LMI then my interest goes up and the loan amount does not increase.

Yes?

 

[FelixL]

Yup that is correct

 

[Peter_Tersteeg]

You'll often find that lenders who pay your LMI (instead of capitalising it onto the loan amount), also charge you exit fees as a percentage of the loan amount. If you do the maths, you'll end up paying it through the higher rates or via the exit costs if you leave.

 

[JohnAJones]

Thank you all very much.

 

[dave99]

For me it was added on to the loan balance. Interest rate was unaffected.