Lender's Mortgage Insurance

[Ignitionnet]

Anyone have any idea why we don't have something like this in the UK, but instead force people to stump up tens of thousands in deposits, which can be a struggle when having to pay someone else's mortgage as well?

I came across it while I was looking at ways to buy a home once we leave the UK in 2012 / 2013.

Lenders Mortgage Insurance (LMI), also known as Private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property. Typical rates are $55/mo. per $100,000 financed, or as high as $1,500/yr. for a typical $200,000 loan.

The page discusses the USA but this system is in operation in a number of places, the other big example that comes to mind being Australia. Given how hosed our housing market is it'd be a huge help to people like me who can happily afford a mortgage but who sadly don't have the Bank of Mum and Dad to tap for a deposit.

Your thoughts people? I appreciate that approximately 2/3rds of you will own your own property

[chris9991]

I think there used to be an insurance scheme on mortagages which protected the lenders when people took out mortgages but, I think, in the late 1990's there was a campaign in the papers to against it as the borrowers paid the insurance but the lenders would benefit.

Or are you talking about protection for people who take out the loan?

[MovedGoalPosts]

As I read that essentially the person taking out the loan would be paying an extra premium (cost) to say that they aren't credit worthy and could default on the loan. The reason the housing market, and indeed the economy is in a mess is because of reckless lending to people who were overstretched. This sort of insurance is just another way to cover inappropriate lending.

[Stuart]

Originally Posted by Rob

This sort of insurance is just another way to cover inappropriate lending.

I suppose that is the case in some instances. However, it's also entirely possible that someone could be extremely credit worthy when they take the loan, only to be made redundant a couple of years later, and saddled with a potentially large mortgage that they can no longer meet the payments on.

Such an insurance system would seem to be handy in these cases.

[danielf]

Originally Posted by Stuart

I suppose that is the case in some instances. However, it's also entirely possible that someone could be extremely credit worthy when they take the loan, only to be made redundant a couple of years later, and saddled with a potentially large mortgage that they can no longer meet the payments on.

Such an insurance system would seem to be handy in these cases.

I don't think that's how it works. The premium is paid to the mortgage lender by people who cannot afford to pay a 20% down payment. The issue is that in cases where the homeowner is forced to sell the house and the sale value is less than the mortgage balance, the lender will lose out. This is unlikely to happen when 20% of the mortgage has been paid off, and the premium is not payable in those circumstances. It's just to cover the lender's risk for the time from taking out the mortgage until 20% of the house value has been repaid. If someone can no longer afford the payments, the house will still be sold.

As said, I can see how it would help some, but how it could also encourage irresponsible lending. Then again, a 20% down payment is a hell of a lot. I can see this working when coupled with a more sensible down payment (say 10%).

[Stuart]

Originally Posted by danielf

I don't think that's how it works. The premium is paid to the mortgage lender by people who cannot afford to pay a 20% down payment. The issue is that in cases where the homeowner is forced to sell the house and the sale value is less than the mortgage balance, the lender will lose out. This is unlikely to happen when 20% of the mortgage has been paid off, and the premium is not payable in those circumstances. It's just to cover the lender's risk for the time from taking out the mortgage until 20% of the house value has been repaid. If someone can no longer afford the payments, the house will still be sold.

As said, I can see how it would help some, but how it could also encourage irresponsible lending. Then again, a 20% down payment is a hell of a lot. I can see this working when coupled with a more sensible down payment (say 10%).

Yep. Looks like I did misunderstand it.

I am sure this was done fairly regularly in the 90's as a one-off payment (called Mortgage Premium Insurance) - I remember a friend being quite upset because a couple of K was put on the mortgage to cover this.