Many new homebuyers and investors don’t know what Lenders Mortgage Insurance (LMI) is, let alone how it affects them when they buy a property. And yet, this form of insurance can add thousands to the cost of buying a home.
What is Lenders Mortgage Insurance?
LMI is a form of insurance that protects a lender against financial loss if you default on paying your home loan. This form of insurance only applies to home loans where the home value to loan ratio is higher than 80 percent. Therefore, if you have a deposit of 20 percent or more of the value of the home you’re seeking to buy then LMI will not apply to you.
Who Does Lenders Mortgage Insurance Protect?
Lenders are protected by LMI, not you, in the event of home loan repayment default. If you are concerned about not being able to make home loan repayments in the future due to unforeseen circumstances, such as job loss, sickness or accident, then you may wish to take out your own mortgage insurance or income protection cover. These covers will then ensure that you are able to make repayments should you find yourself without an income. In addition, they also give you peace-of-mind as they reduce any financial stress.
When is Lenders Mortgage Insurance Paid?
Spanning over the term of your loan, LMI is usually paid one of two ways, either up-front when you take out your home loan or you can pay it in instalments over the term of your loan. If you select the second method then an amount will be added to each of your repayments.
How Much is Lenders Mortgage Insurance?
The cost of LMI depends on how much you borrow, the size of your deposit and the value of the property you’re seeking to buy. Typically, the higher your home loan to property value ratio is, the greater the amount you’ll pay in LMI. For instance, let’s say you’re interested in buying a home worth $300,000 and you want to borrow $280,000. The estimated amount of LMI you will pay is approximately $6,400. Of course, if you borrow 90 percent of the property’s value you will pay a higher fee than someone who is borrowing 85 percent.
Another factor that may increase the amount of LMI you have to pay is the amount of existing debt you have. Typically investors who may have more than one home loan will pay more in LMI than say a first home buyer who has only one home loan and represents less of a financial risk.
Are There Any Benefits in Paying Lenders Mortgage Insurance?
LMI allows you to buy a home sooner as you don’t have to wait to save a 20 percent deposit. It also allows home buyers to save more on the cost of a property as property prices typically rise over time, and by being able to buy a home sooner home buyers avoid having to pay any capital gain a property may have incurred while they were waiting to save their 20 percent deposit. It also allows home buyers to take advantage of historically low interest rates.
Can I Avoid Paying Lenders Mortgage Insurance?
Yes, if you don’t want to pay LMI there are a number of ways that you can avoid this. You can ask your parents, a family member or even a friend to go ‘guarantor’ on the property you’re seeking to buy. This then means that if you cannot afford to pay your home loan, then your guarantor will then assume the financial responsibility of your property and will have to start making repayments on your behalf.
The other way you can avoid paying LMI is to save a minimum of 20 percent of the property’s value that you wish to buy. On a property worth $250,000 this equates to a deposit of $50,000. You’ll also need to save the money for legal fees and stamp duty which may add another $10,000 to the cost of a $250,000 property. The general rule of thumb is the higher the cost of your home, the larger your deposit, legal costs and stamp duty will be.
Is Lenders Mortgage Insurance Refundable?
If you terminate your home loan early and you’ve pre-paid your LMI, then yes you may be entitled to a partial refund. However, this depends on how your lender has arranged for your LMI to be paid. This is a question you should ask your lender when you first discuss LMI.
Do I Need to Apply for Lenders Mortgage Insurance (LMI)
No, your lender will arrange LMI for you and will supply you with your needed documentation and information. To be eligible for LMI you and your property will need to meet LMI underwriting guidelines.
Do you require more information about Lenders Mortgage Insurance?
If you said yes, then eChoice can HELP you.
Written by eChoice
Since 1998, eChoice has helped more than 50,000 Australians secure a home loan through its network of over 25 lenders and hundreds of loans. Best of all our service is cost and obligation free!