Our resident home loan expert, Jessica Darnbrough, clears the fog on Lenders Mortgage Insurance.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is an insurance that protects your lender in the event that you default on your loan. While LMI protects your lender, it can also help you get into the property market sooner, as it stops you from having to boast a 20% property deposit. As a borrower, you will more than likely be required to pay LMI when you have to borrow 80% or more of the property's purchase price.
Who does Lenders Mortgage Insurance Protect?
Even though as the borrower, you will have to pay LMI if you are borrowing more than 80% of the property's purchase price, it is important to note that the insurance does not protect you but your lender. In other words, LMI won't cover you in the event you default on your loan. Instead, it covers your lender. The two major LMI providers in Australia are Genworth and QBE LMI.
When do I have to pay Lenders Mortgage Insurance?
Unlike other insurances, LMI is a one off fee and will last the life of the loan. The fee can be paid in two ways, upfront at the time of loan settlement in one lump sum, or it can be capitalised onto your overall loan amount so that you can pay it in increments.
How much will it cost me?
The cost of LMI will vary in price depending on a few factors, including how much money you intend to borrow, the size of your deposit and therefore your loan-to-value-ratio. Generally speaking, the higher your Loan-to-value-ratio (LVR) the more you will be required to pay in LMI. For example, someone who borrows 95% of the property's purchase price will be paying a larger fee compared to someone who borrowed 90%. Furthermore, it is widely expected that second home buyers and investors tend to pay more in LMI than first home buyers and that is simply because the risk of having two home loans as compared to one is dramatically higher, which increases the LMI premium. Mortgage Choice's LMI calculator will give you a rough indication of what you can expect to pay in LMI.
What are the benefits of paying Lenders Mortgage Insurance?
Thanks to LMI, you may find you are able to get onto the property ladder sooner rather than later because you do not need to save a massive 20% property deposit. Lenders Mortgage Insurance will allow you to get onto the property ladder with a 10% deposit or less.
How can I avoid paying Lenders Mortgage Insurance?
If you do not want to pay LMI, there are a couple of ways you can avoid it. Firstly, you could get someone (like a parent) to go guarantor on your loan. This means your loan is guaranteed by someone else who is liable for a small amount of your loan. Over the past few years, parental guarantees have proven to be increasingly popular with first home owners who wish to get onto the property ladder and take advantage of the low rate, high yield environment.
If you can't find someone to go guarantor on your loan, you will be required to save a 20% deposit. So, if you are looking to purchase a home that is worth $500,000, you will have to have a deposit of $100,000. Keep in mind you may also have to pay legal fees and stamp duty, so you will probably need thousands of dollars on top of your $100,000 deposit in order to bring your LVR down to 80% or lower.