Owning a home is one of the most rewarding milestones in life, but saving a large deposit can often be a challenge. The good news is that there are lenders who will consider a deposit of less than 20% depending on the amount you are looking to borrow.
While it is a way to get your dream home sooner, it's important to be aware that it does come with a risk fee, commonly known as ‘Lenders Mortgage Insurance (LMI)’ though the terminology may vary between lenders.
Here we explain the different types of risk fees, to guide you through your home buying journey.
What is a risk fee and why do they exist?
A risk fee is a one-off, extra fee payable by you as a borrower if you have less than a 20% deposit saved. Some Lenders may use this to either offset the risk associated with loans of a higher Loan to Value Ratio (LVR) - generally more than 80% of the property value - or to protect the Lender from a possible financial loss if you’re unable to meet your home loan repayments.
Lenders will usually have an internal credit policy around the maximum LVR’s it can lend depending on post code as well as the property that is being used as a security. If you require higher LVR such as in the case when you do not have enough deposit to cover the cost of the purchase, some Lenders 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 Money charge one of the below mortgage risk fees.
The different types of risk fees:
Lender’s Mortgage Insurance (LMI)
LMI is a one-off fee that you will have to pay to protect the lenders against unfortunate event of a defaulted loan. This type of insurance is provided by a ‘third party’ (a separate insurance company working with the loan provider) and therefore any loan needs to meet that insurance supplier’s credit criteria as well as the lender’s. This fee gets paid upfront, but if you refinance later the fee may in certain circumstances be refundable.
Lender Protection Fee (LPF)
Similar to LMI, this is a one-off fee charged by Pepper Money to protect us in a case where you’re unable to meet your mortgage repayments. 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.
Mortgage Risk Fee (MRF)
Like a Lender Protection Fee, MRF is a one-off fee charged by Pepper Money to protect ourselves from a possible financial loss if you’re unable to meet your home loan repayments. Similar to LPF, this fee 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.
A risk fee can be a big extra cost, so knowing what fee is applicable to your home loan application, and when it needs to be paid, is important so you can consider this in your budgeting plan. Aim to save a higher deposit if you can, to avoid having to pay this extra fee.
While the risk fee protects the Lender, there are options to consider that can protect you from risk in the event of unexpected circumstances in which you are unable to meet your loan repayments – such as taking out mortgage protection insurance. This insurance is optional and you will have to obtain this from an insurance provider company. Note that terms and prices will vary so check out the small print before you commit.
Want to learn more?
Aside from risk fees, it’s important to be aware of all the fees associated with buying a home so that you can put some money aside to cover these expenses and be well prepared. Read more here.
Ready to take the next step? 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 range of home loan options which might be right for you. Speak to one of our Lending Specialists today on 13 73 77 who can start the process of assessing your individual circumstances.