April 01, 2012
Lenders’ Mortgage Insurance (LMI) is generally charged by a lender when you borrower more than 80% of a property’s value when taking out a home loan.
LMI insures the lender against any loss incurred if you default on the loan and the net proceeds of an enforced sale of the property are not enough to cover the remaining loan balance.
Keep in mind LMI does not cover you (the borrower) meaning the mortgage insurer may still look to you to recoup the funds paid out. LMI should not be mistaken for income and mortgage protection insurance, which insures you if they are unable to meet your loan repayments due to such circumstances as death, sickness, unemployment or disability.
You should also be aware that LMI is not transferable between loans, for example, if a borrower decides to refinance to a new lender and/or loan and the loan amount remains over 80% of the property’s value, they will be required to pay LMI again.
While you may feel disheartened paying insurance cover to benefit lenders and not yourself, LMI is often a necessary evil. If the lenders could not cover their risk, they would be unlikely to lend up to 95% of a property’s value. Without LMI, you would be hard pressed to get a home loan with a deposit of less than 20%.
LMI may be the saving grace that helps some borrowers enter the property market sooner and with a smaller deposit size. However, the decision to pay LMI and jump in now at today’s property prices as opposed to holding off, watching the market and saving a larger deposit needs to be weighed up carefully.
When do you need to pay LMI?
LMI is a one-off premium payment you pay to the lender (or the lender’s insurer) at loan settlement, which provides the lender with insurance cover for the life of that particular loan.The lender will calculate the premium by taking into consideration your loan size compared to the value of the property and aspects of the property itself such as type, location and size. The cost of LMI can be anywhere from a few hundred to many thousands of dollars. Though you probably won’t have to pay it upfront – most lenders allow borrowers to add the cost of LMI into the loan amount and include payments in their monthly loan repayments.
What is a mortgage broker’s role in the LMI process?
Shopping around for loan and investigating the LMI options may save you money or be the difference between being approved or declined for a home loan.Mortgage brokers are aware of the various LMI options available from lenders on their panel and can alert you to lenders who self-insure or offer discounts.Not only will a mortgage broker advise you if a chosen loan requires LMI, they will prepare all the necessary documentation and application.
Can I avoid paying LMI?
If you have a deposit greater than 20% of the property’s value and additional funds to cover any government fees and stamp duty, will not be required to pay LMI.One way to avoid LMI is to have a family member go guarantor on your loan.
This means the family member provides a guarantee to the lender for 20% of the property’s value by using equity in their own property/ies as security.This approach removes the need for LMI and helps bridge the upfront expenses and deposit gap, assisting you in gaining loan approval and maximising the amount you may be able borrow. However, this is based on the condition that you can comfortably repay the loan on your own.
The guarantee can be removed down the track once enough equity has been built up in the new property. Different lenders have different criteria and timeframes for this.These types of arrangements need to be approached with care and it is always a good idea to seek legal advice to ensure all parties are fully aware of their rights and responsibilities.If all goes well this method of purchasing property can be quite advantageous to someone trying to get off the rental roundabout and onto the property ladder while avoiding costly LMI.
For more information contact Richard Windeyer on 1800 01 LOAN or click here to "Book a Meeting"