What is Lenders Mortgage Insurance (LMI)?
Simply put, Lenders Mortgage Insurance (LMI) is an insurance policy that a lender takes out to protect themselves if they believe they are taking too much risk in lending money as a home loan. The premium is paid by the borrower as a once off payment at the time of settlement and most of the time can simply be added to the final loan amount (which we call “capitalising the LMI”).
How might a lender be taking too much risk and want to insure themselves?
To try and simplify a complicated subject, if the lender has to lend a high percentage of the property’s value, and there’s not much room for error if things go wrong, they see this as a risk that they need to insure. If you don’t already understand LVR and how it affects LMI, it is worth reading our blog post, “What is LVR” first. This will arm you with the knowledge to understand the detail about LMI in the rest of this post.
The less wiggle room there is between the amount of the debt and the value of your security property (ie the higher the LVR), the more risk the lender is taking. The more risk the lender takes, the more their LMI policy is going to cost. It’s a serious issue too. LMI is a one-off, upfront charge, that can be as much as 5% of the loan amount! That’s a lot of money for most people, so we should do what we can to reduce or avoid it! If the LVR can be kept under 80% by increasing the deposit amount or perhaps by using a guarantor, then LMI will be avoided entirely.
So, how much does LMI actually cost?
It varies quite a lot, from $1,500 or thereabouts all the way up to as much as $30,000 or even more in some scenarios. Let’s consider a common scenario: the purchase of a $500,000 house, with a $450,000 loan (because you have enough deposit to cover the $50,000 plus fees and charges). A $450,000 loan secured against a $500,000 property gives an LVR of 90%. Depending on the lender, at the time of writing (February 2017) the LMI could be anywhere between $8,000 and $10,000. If the LVR is 95% (because you only have $25,000 less deposit) then the LMI would be between $16,000 and $18,000.
LMI varies depending on a number of factors, including:
- who the lender is
- which mortgage insurance company is used
- the loan selected
- whether the property will be owner occupied
- whether the borrowers are self employed or PAYG employees
- whether there are genuine savings
- whether the First Home Owners Grant will be used
If this sounds complicated, or confusing, it really doesn’t have to be! Our role as experienced mortgage brokers is to discuss and consider LMI with you, and help you make the best decisions possible for your own unique situation. For more information simply call 9309 4780 or email email@example.com.
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