Risk Fees in Home Loans Explained

Are you having a hard time completing the documentation requirements for a home loan? Some banks and lending institutions may still approve your application even if you don’t meet these requirements. These lenders typically charge a risk fee as an alternative to Lenders Mortgage Insurance.

What is a Risk Fee?

A mortgage risk fee is a one-time fee charged if you have a deposit of less than 20% saved when applying for a home loan. Lenders use this fee to offset the increased risk associated with loans with a higher loan-to-value ratio, typically over 80% of the property value. It also protects lenders from potential financial losses if borrowers cannot repay their home loans.

Risk fees are typically calculated based on the loan size and LVR and may vary from lender to lender. Remember that the higher the increases, the higher the risk fees.

Lenders usually have an internal credit policy that outlines the maximum LVR they can lend. If you require a higher LVR, meaning you do not have a sufficient deposit to cover the property purchase cost, some lenders may be willing to take on a higher risk by lending outside of their standard credit policy.

Here are some examples of mortgage risk fees that lenders may charge:

Lender’s Mortgage Insurance

This fee is charged by lenders when the LVR exceeds 80%. LMI is insurance that protects the lender if the borrower defaults on the loan. The cost of LMI varies depending on the size of the loan and the LVR.

Low Deposit Premium

This fee is charged by some lenders when the LVR is between 85% and 90%. The LDP is a one-time fee added to the loan amount, which can be several thousand dollars.

Risk Fee

This fee is charged by some lenders when the LVR is above 90%. The risk fee can be a percentage of the loan amount or a flat price, and it is designed to compensate the lender for taking on a higher risk.

When is a Risk Fee Charged?

A risk fee may be charged under the following circumstances:

Benefits of a Risk Fee

Lower Cost

Compared to an LMI, a risk fee is generally cheaper as it does not carry the government taxes like stamp duty or GST, which are normally applicable on an insurance premium. On a premium chart, the risk fee table is usually cheaper, even when excluding government taxes.

Lender’s Niche Area

Major banks who offer a risk fee instead of LMI do so to save the client LMI costs, and this creates a niche area where they sell loans at high LVR with discounted costs in comparison to other big bank lenders.

Access to Finance for Higher Risk Borrowers

Non-bank lenders who offer a risk fee are generally non-conforming lenders who cannot get LMI for high LVR loans and thus charge a risk fee to mitigate any possible losses. This allows them to lend to borrowers who could have had bad credit issues. Even though risk fees of non-bank lenders are generally higher, they cater to higher risk borrowers, and the fee helps offset potential losses.

No Need for External Insurer

Since the lender underwrites the risk fee, there is no need to seek LMI from an external insurer who might not approve a loan. This saves the borrower time and hassle, and it also simplifies the loan application process.