A First Home Loan borrower sees a 1.2% Lender's Mortgage Insurance charge on the loan documents and assumes it will cover repayments if they lose their job. What does this premium actually do?
Correct Answer
C) It insures the lender against loss if the loan defaults, not the borrower.
Kāinga Ora explains that a First Home Loan is a form of Lender's Mortgage Insurance, which insures lenders against loss if a loan goes into default. The borrower pays a 1.2% premium, up front or added to the loan. It is not the kind of mortgage insurance that protects borrowers if their circumstances change.
Why This Is the Correct Answer
The premium pays for insurance that protects the lender, not the borrower.
Why the Other Options Are Wrong
Option A: It covers the borrower's repayments if they lose their job or fall ill.
Kāinga Ora says this is Lender's Mortgage Insurance, which protects lenders; borrower mortgage protection is a different product.
Option B: It is a Kāinga Ora application fee that is refunded at settlement.
It is an insurance premium of 1.2% of the loan amount, not a refundable fee.
Option D: It is optional and is only charged when the deposit is below 10%.
Paying the 1.2% premium is part of the First Home Loan criteria; it can be paid up front or added to the loan.
Background Knowledge for Finance
Source: https://kaingaora.govt.nz/en_NZ/home-ownership/first-home-loan/
Exam Tip for Finance
Lender's Mortgage Insurance protects the lender; mortgage protection insurance protects the borrower.
Common Mistakes to Avoid on Finance Questions
- •Telling a buyer that the 1.2% premium protects them if they cannot pay.
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When assessing a mortgage application, which factor is typically given the highest priority by New Zealand lenders?
James has been contributing to KiwiSaver for 4 years and wants to withdraw funds for his first home. His KiwiSaver balance is $45,000, but $15,000 consists of government contributions and employer matching. What is the maximum he can withdraw for his house deposit?
What is the main advantage of a table mortgage compared to an interest-only mortgage?
- → What is the maximum amount a first home buyer can withdraw from their KiwiSaver account for a house deposit?
- → What does LVR stand for in New Zealand mortgage lending?
- → What is the key difference between a table mortgage and an interest-only mortgage in terms of monthly payments?
- → A bank checks how much of a borrower's gross income would go on debt repayments. The borrower earns $80,000 a year, already pays $800 a month on other debts, and the new mortgage would cost $2,200 a month. What share of gross income would the repayments take?
- → Sarah earns $80,000 annually and wants to borrow $400,000. What is her debt-to-income ratio?
- → A property is valued at $600,000 and the buyer has a $100,000 deposit. What LVR would this loan represent?
- → Which of the following is NOT typically considered by banks when assessing lending criteria?
- → How long must a KiwiSaver member have been contributing before they can withdraw funds for their first home?
- → Which type of mortgage allows borrowers to make additional payments that can be re-borrowed later?
- → A couple with a combined income of $120,000 wants to buy their first home for $650,000. They have a 15% deposit. What is their LVR?
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