June 30, 2017
Lenders Mortgage Insurance (LMI) is an insurance that protects your lender in the event that you default on your loan.
While this insurance doesn’t protect you as the borrower, LMI can help you get into the property market sooner rather than later.
Simply put, Lenders Mortgage Insurance allows you to obtain finance from a lender without having to stump up a 20% (plus costs) home deposit.
Generally speaking, lenders do not want to lend to borrowers who do not have a 20% deposit because it is too risky.
By having LMI in place, lenders feel more comfortable lending to borrowers who do not have a 20% deposit.
Today, thanks to LMI, many lenders are happy to lend to a borrower who has a deposit of just 5% - which is a great win for home buyers because it ensures they do not have to save as much money, saving them stress and time.
Now that you have a general understanding of what LMI is, you are probably wondering when you have to pay it and how much it is?
If you are trying to borrow more than 80% of your chosen property’s purchase price from a lender, you may be required to pay Lenders Mortgage Insurance.
The exact amount you have to pay will depend on how much money you need to borrow and what your loan to valuation ratio is.
For example, say you wanted to buy a $500,000 home and need to borrow 90% of the property’s value (or $450,000), you may be required to pay up to $10,000 in Lenders Mortgage Insurance.
Thankfully, this insurance is a one off fee and will last the life of the loan. The fee can be paid in two ways: you can either pay it upfront at the time of loan settlement, or capitalise the insurance premium onto your overall loan amount so that you can pay it in increments.
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.
If you can’t find someone to go guarantor on your loan, you will be required to save a 20% deposit plus costs – including stamp duty, legal fees etc.
As your local broker I can talk you through the home loan process and identify how much LMI (if any) you would need to pay. I can also help you look at other alternatives and ultimately secure you the right home loan for your needs.