Understanding home loan risk fees
Owning a home is widely regarded as one of life’s key achievements. But saving a large deposit can be a challenge. A 20% deposit is often mentioned as the target to help secure a more competitive home loan interest rate, but many lenders will consider a lower deposit.
What are the implications of a lower home loan deposit?
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 understand that it may come with a risk fee, commonly known as Lenders Mortgage Insurance (or LMI). Below, we explain some of the different types of risk fees to help 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 often dependent on the size of the deposit that you can contribute to the purchase. 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 repay your home loan.
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, some lenders may still be willing to finance your loan, but may charge one of the below mortgage risk fees to do so.
The different types of risk fees:
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Lender Protection Fee (LPF)
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This is a one-off fee charged by lenders to protect themself in the event the lender is unable to recover the outstanding balance of the loan. 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.
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.
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Lender’s Mortgage Insurance (LMI)
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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.
Fees such as LMI or LPF may not always be refundable, so it's important that you read the lender's product terms carefully.
FAQs about home loan risk fees
A lower home loan deposit can help you buy a property sooner, but it may come with a risk fee, commonly known as Lenders Mortgage Insurance (LMI). This fee reflects the higher risk to the lender when the loan has a higher loan to value ratio.
A risk fee is a one-off fee that depends on the size of your deposit. Lenders use it to offset the risk of lending at a higher loan to value ratio, typically above 80 percent, or to protect against financial loss if repayments are not met.
Lenders Mortgage Insurance is a one-off fee paid to protect the lender if a home loan defaults. It is usually provided by a third-party insurer and is often paid upfront, although in some cases it may be refundable if the loan is refinanced, depending on the circumstances.
A Lender Protection Fee is a one-off fee charged by some lenders to protect themselves if you cannot meet your mortgage repayments. It can be paid at settlement or added to the loan amount and repaid over time, as long as it stays within the maximum allowable loan to value ratio.
Lenders may charge risk fees when a home loan has a higher loan to value ratio, generally above 80 percent. This reflects the increased risk to the lender when borrowing a larger portion of the property value.
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 may apply when you get a home loan.
Contributor | Barry Saoud, General Manager, Mortgages and Commercial Lending
Barry joined Pepper Money in July 2021 as General Manager, Mortgages and Commercial Lending. He is responsible for the strategic direction and operating performance across product, credit, and settlements for mortgages, commercial loans, personal loans, and direct sales.
Published by Pepper Money. Read our Editorial Policy to learn how we create and review content.
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