A Lender Protection Fee (LPF) is a one-off, up-front and generally non-refundable fee that some lenders use to offset the risk associated with loans of a higher Loan to Value Ratio (LVR).
An LPF is somewhat similar to Lenders Mortgage Insurance (LMI), which protects lenders against the unfortunate event of a defaulted loan.
Why do they exist?
Lenders will usually have an internal credit policy around the maximum LVR’s it can lend depending on post code as well as property. If a borrower requires a higher LVR such as in the case that they do not have enough deposit to cover the cost of the purchase, the lender may be willing to take a higher risk by lending to areas outside their standard credit policy. To cover this higher risk, lenders like Pepper charge an LPF.
How LPF differs from LMI
Lenders who use LMI rather than LPF as their insurance system, require your loan application to be approved by a third-party mortgage insurer and therefore also subject to their lending criteria. This means ultimately the third-party mortgage insurer can turn down loan applications submitted by the lenders – adding another layer of complexity to the approval process.
LPFs on the other hand give non-conforming lenders, such as Pepper, the flexibility to assess loan applications without having to seek third-party LMI approval.
How the Loan to Value Ratio ties in
With Pepper, the LVR is integral to whether the LPF is triggered. LVR is an evaluation tool that determines the amount a lender will loan to you, based on the cost of the home and the amount of your deposit. If a house is worth $800k and you need to borrow $720k then your LVR is 90 per cent.
LPFs can allow Pepper to manage its own risks associated with offering prime loans, without having to refer your application to a third-party mortgage insurer and having it rejected at the last minute because of their criteria. LPFs are required only on the Pepper Essential product for Full Doc loans with 85 per cent or greater LVRs (80 per cent if you’re after interest only) and for Alt Doc loans with Pepper where the LVR is 70 per cent or greater.
The fee is based on a matrix and is paid when the loan is taken on by a borrower. However, the fee doesn’t impact the interest rate applicable to your loan application.
LPF can either be paid upon settlement of your loan or capitalised to your loan, provided that capitalising the fee does not cause your loan to exceed the maximum allowable LVR for your product. Capitalising the LPF means that the fee is added to your loan amount, allowing you to pay the fee over the life of the loan rather than one lump sum payment at settlement.
What are your options?
Whether you’re looking to refinance, ready to buy your first home, self-employed or looking to invest in property, take a look at our home loan options which might be right for you. Ready to take the next step? Speak to one of our Lending Specialists today on 13 73 77 who can start the process of assessing your individual circumstances.