June 17, 2015
You may have heard of lenders mortgage insurance (LMI), but do you know exactly what it is and what it covers?
Borrowers who don’t have a full deposit can generally access finance if they agree to pay LMI, giving them a much-needed foot in the door.
Here are some of the most common questions regarding LMI.
What exactly is lenders mortgage insurance (LMI)?
LMI is a fee lenders charge to borrowers who don’t have a full deposit, which is generally 20% of the loan value. A common misconception amongst buyers is that LMI is for their own protection, but it is in fact a safety net for the lender.
Lenders charge LMI because borrowers with a deposit of less than 20% pose a higher risk than those who have managed to save this sum. This is because the difference between the amount of money they borrow and the value of the property is marginal (a calculation known as loan to valuation ratio).
If you are in this situation and you default on your loan, there is likely to be a discrepancy between the sale price of the property (which may be lower than market value in the event of a forced sale) and the sum of your debt. LMI offers lenders protection against this.
How much does it cost?
LMI is calculated as a percentage of your loan amount. The sum you have to pay will depend upon how much money you wish to borrow and your loan to valuation ratio.
Other factors that affect your LMI payment include whether the property is a home or investment, your employment status, your savings record and whether you are applying for a first home owner grant.
Use the Mortgage Choice LMI calculator to work out roughly how much LMI you will be required to pay.
How do I pay for LMI?
LMI can either be paid upfront or added to the value of your home loan. Your payment arrangement will depend upon your lender and your particular loan.
In many cases borrowers don’t have the funds to pay LMI upfront, so chat to your lender about how it can be added to your home loan.
What are the advantages of paying LMI?
LMI may be an expense you’d rather not incur, but in some instances it is cheaper than saving for an entire deposit.
The main benefit of paying LMI is that you can own your home sooner. If you are ready to purchase a home but aren’t in a position to save the full 20% deposit in a reasonable time, LMI can help you get your foot on the property ladder.
With property prices continuing to rise, saving a 20% deposit is becoming increasingly difficult, especially for those who are renting and trying to save at the same time.
In some situations, LMI can be a cheaper option than waiting to save for a deposit. If you are renting and trying to save your deposit, work out how long it is likely to take you to save and then consider how much rent you would have paid in this time and how much the value of property you wish to purchase is likely to increase by. In this situation, you may find LMI to be a cheaper option.
Remember that if you are able to save a full deposit, you won’t need to borrow as much and will then pay less interest over the life of your loan.
What else should I know about LMI?
LMI can be a sizable expense that you may not have factored for when preparing your budget. If you need to access LMI and you haven’t factored it into your expenses, you may need to recalculate your budget.
The second thing to remember when applying for LMI is that your home loan application may take longer to be processed. Keep this in mind when you are submitting your application and looking for properties.
Can LMI be waived?
There are some circumstances where lenders will waive LMI, however these are for specific cases only. I can help you assess if you are eligible for this or whether paying LMI is the right option for your situation.
For buyers who are ready to enter the property market, LMI is a great opportunity to make it happen.