by Chris Cooke
Mortgage Choice broker in Morphett Vale, SA
A large number of first home buyers searching for a home loan don't understand how Lenders Mortgage Insurance (LMI) works.
Too often, home buyers shopping around for a home loan mistakenly believe that LMI covers them for a missed payment. But it's important that borrowers understand the insurance does not provide any protection to them.
In fact, LMI is a one-off payment to the lender (or lender's insurer) that insures the mortgage if you are looking to borrow over a certain percentage of the property price.
Therefore, the payment actually insures the lender for any shortfall on a home loan so if you default on your mortgage, the insurance will cover the difference between what your property is sold for and the amount still outstanding on the home loan.
It's a necessary insurance
Lenders Mortgage Insurance is necessary when you're borrowing more than 80% of the value of the property.
But depending on which lender you go with, you may be able to borrow as much as 85% without having to fork out LMI. Just recently, I managed to save as much as $17,000 for a client simply by swapping over to a different lender.
Lenders Mortgage Insurance is a percentage of the borrowed amount (around $5000 on a $350,000 purchase at 90%), but for large home loans, I have seen the insurance premium as high as $50,000.
Can the insurance be added to your mortgage?
When shopping around for a home loan, make sure you bear in mind that some lenders allow you to add this fee to your mortgage, while others expect you to fork out for it out of your own pocket.
Ultimately, whether or not the amount can be added to your mortgage can make a big difference to how much deposit you need to save.
The question borrowers need to consider is whether or not they're better off saving that first 20% of the loan before shopping around as real estate prices and interest rates continue to rise, or whether to fork out for Lenders Mortgage Insurance and get into the real estate market now.
I've seen many instances where customers have waited to save enough to avoid paying LMI and seen property prices rise faster than they can save. In fact, one of my referrals from 2001 still haven't bought a house, and now probably never will because while they were saving an extra $10,000 to eliminate paying Lenders Mortgage Insurance, property prices in the area they want to live rose by $200,000.
Lenders Mortgage Insurance is a big help to borrowers as without it, buying a property would be out of reach for many people as they would have to save a deposit up to 20% of the purchase price, plus the costs associated with buying property. With LMI, the required deposit is generally 5% to 10% of the property price.
What do you think? Do you love or loathe LMI?