August 30, 2015
Lenders’ Mortgage Insurance (LMI) is generally charged by a lender when borrowing more than 80% of a property's value when taking out a home loan.
LMI insures the lender against any loss incurred if a borrower defaults on the loan and the net proceeds of an enforced sale of the property are insufficient to cover the remaining loan balance. Keep in mind LMI does not cover the borrower, meaning the mortgage insurer may still pursue the borrower to recoup the funds paid out.
Those looking to borrow should also be aware that LMI is not transferable between loans, for example, if you already have a mortgage and decide to refinance to a new loan and/or lender and the loan to value ratio remains over 80% you will likely be required to pay LMI again.
While borrowers may feel disheartened by paying insurance to benefit the lenders, 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. So in other words, without LMI, you would be hard pressed to get a home loan with a deposit of less than 20% of the purchase price.
LMI may be the saving grace that helps some enter the property market sooner and with a smaller deposit size. However, the decision to pay LMI and jump in now as opposed to holding off and saving a larger deposit needs to be weighed up carefully.
When making this decision, borrowers need to consider a range of factors such as what price they put on being able to buy a property now at today’s prices compared to how much a property’s value may rise in the time spent saving a larger deposit.
How do you pay LMI?
LMI is a one-off premium payment borrowers pay to their lender (or the lender’s insurer) at loan settlement, which provides the lender with insurance cover for the life of the loan.
The lender will calculate the premium by taking into consideration the borrower’s 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 borrowers 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.
Shopping around for loan and investigating the LMI options may save customers money or be the difference between being approved or declined for a home loan.
Can I avoid paying LMI?
Borrowers who 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 the loan. This means the family member provides a guarantee to the lender for 20% of the purchase price by using equity in their own property/ies as security. This approach removes the need for LMI and helps bridge the borrower’s upfront expenses and deposit gap, assisting them in gaining loan approval and maximising the amount they can borrow. However, this is based on the condition the borrower can repay the loan on their own.
These types of arrangements need to be approached with care and I suggest legal advice is sought, to ensure both parties are fully aware of their rights and responsibilities. If the borrower cannot meet their repayments down the track the guarantor's property could very well be at risk.
On the flipside, if all goes well this method of purchasing housing can be quite advantageous to someone trying to get off the rental roundabout and onto the property ladder while avoiding costly LMI.
To discuss your home loan and financial needs, give me call. Richard Windeyer, from Mortgage Choice Cardiff and Charlestown a call on 1800 01 LOAN or 0413 245 556. Or, visit https://www.mortgagechoice.com.au/richard.windeyer