April 07, 2017
LMI is Lenders Mortgage Insurance and here is all the information you to know about it.
What does it mean?
When looking to purchase a new property or refinance an existing loan you may come across LMI. Lenders will require you to pay Lenders Mortgage Insurance when your loan to value ratio is greater than 80% and the amount can be quite substantial.
Lenders Mortgage Insurance is an insurance policy that protects the lender but provides no protection to yourself or the property. The reason you are required to pay LMI with an LVR greater than 80% is that the bank needs security in place to protect their investment. If you are unable to make your loan repayments for some unforeseen reason the bank will sell the property to pay off the debt however the risk increases as your LVR does due to the possibility of your property dropping in value as the sale may not cover the outstanding loan amount. The amount of LMI you will need to pay changes between each lender, purchase price and your LVR percentage. The closer to 80% you are the less you will need to pay.
How does it affect me if I want to purchase a property?
When purchasing a property, it is becoming more and more common for people to have to pay LMI as it is becoming increasingly difficult to come up with a 20% deposit. Some lenders will allow you to add your LMI onto your loan amount while other lenders will require you to pay it upfront. It is important to remember that both of these options will have an impact on your total loan amount and you will need a larger deposit than you may have initially thought to cover the minimum 5% requirement.
How does it affect me if I want to refinance?
When refinancing it is rather uncommon we recommend someone to do so with an LVR greater than 80% unless there are special circumstances surrounding the deal. Refinancing to a lower rate may seem like you are guaranteed to save money but the costs of refinancing along with a substantial LMI amount can mean you are actually spending more money than you would if you stayed with your current lender for an extra 6 months to a year to get your LVR under 80%.
Everyone’s loan is unique and it is always best to seek professional advice about what your best options are. We would love to meet with you and answer any questions you have about your purchase or refinance.