Understanding home loan risk fees
Owning a home is one life’s key achievements but saving a large deposit can be a challenge. A 20% deposit is often touted as the target which will secure a more competitive home loan interest rate, but some lenders will consider a lower deposit. But what are the implications?
While getting a home loan with a lower deposit can be a way to get the keys to your dream home sooner, it's important to be aware that it does come with a risk fee, commonly known as Lenders Mortgage Insurance (or LMI). 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 fee payable if you have less than a 20% deposit saved. Lenders use this to 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 themselves from a financial loss if you’re unable to meet your home loan repayments.
Lenders usually have an internal credit policy around the maximum LVR they’ll lend to depending on various factors. If you require a higher LVR – or in other words don’t have enough deposit to cover the cost of the purchase – some Lenders may be willing to take a higher risk by lending outside of their standard credit policy. To cover this higher risk, lenders often 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’ll 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). LMI gets paid upfront, but if you refinance later the fee may be refundable in certain circumstances.
-
Lender Protection Fee (LPF)
-
Similar to LMI, this is a one-off fee charged by lenders to protect us in case you’re unable to meet your mortgage repayments. LPF can either be paid upon settlement of your loan or added to your loan amount and paid off over the life of the loan – as long as this doesn’t cause your loan to exceed the maximum allowable LVR for your individual home loan product.
-
Mortgage Risk Fee (MRF)
-
MRF is another one-off fee charged by lenders to protect us 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 added to your loan, provided that adding the fee doesn’t cause your loan to exceed the maximum allowable LVR for your product.
A risk fee can add a substantial financial outlay, so it’s important to know which fees, if any, are applicable to your home loan application, so you can consider this in your budgeting plan. It could be a good idea to save more than a 20% deposit to avoid having to pay these extra fees.
While these risk fees protect the lender, there are options to consider that can protect you from risk in the event that real life gets in the way of meeting your loan repayments. Mortgage protection insurance, for example, is an optional form of insurance to help in such circumstances.
Want to learn more about home loan fees?
Aside from risk fees, it’s important to be aware of all the fees associated with buying a home so you’re well prepared. Read more about the fees that apply when you get a home loan.
Want to find out where you stand?
Sign up to our newsletter
If you like this article, you'll love our monthly Real Lives newsletter.
View our Privacy Policy
Need some help with your first home loan?
Whether you’re confused the purchase process, wondering what LMI or LVR mean, or are looking for help along the way, our resources are here to make sense of all that finance jargon.
Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser.
All applications are subject to credit assessment, eligibility criteria and lending limits. Terms, conditions, fees and charges apply.
The results of the borrowing power calculator are based on information you have provided and is to be used as a guide only. The output of the calculator is subject to the assumptions provided in the calculator (see 'about this calculator') and are subject to change. It does not constitute a quote, pre-qualification, approval for credit or an offer for credit and you should not enter commitments based on it. The interest rates do not reflect true interest rates and the formula used for the purpose of calculating estimated borrowing power is based on the assumption that interest rates remain constant for the chosen loan term. Your borrowing power amount will be different if a full application is submitted and we complete responsible lending assessment. The results in the calculator do not take into account loan setup or establishment fees nor government, statutory or lenders fees, which may be applicable from time to time. Calculator by Widgetworks.
Pepper Money Personal Loans is a brand of Pepper Money Limited. Credit is provided by Now Finance Group Pty Ltd, Australian Credit Licence Number 425142 as agent for NF Finco 2 Pty Limited ACN 164 213 030. Personal information for Pepper Money Personal Loans is collected, used and disclosed in accordance with Pepper’s Privacy Policy & the credit provider’s Privacy Policy.
Pepper Money Limited ABN 55 094 317 665; AFSL 286655; Australian Credit Licence 286655 (“Pepper”). All rights reserved. Pepper is the servicer of home loans provided by Pepper Finance Corporation Limited ABN 51 094 317 647. Pepper Asset Finance Pty Limited ACN 165 183 317 Australian Credit Licence 458899 is the credit provider for asset finance loans.
Pepper and the Pepper Money logo are registered trademarks of Pepper Group Assets (Australia) Pty Limited and are used under licence.
