Understanding home loan risk fees

family checking out a property they want to buy

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.

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