What is LMI?
Lenders’ Mortgage Insurance (LMI) is insurance that a lender takes out to protect itself against the risk of not recovering the full loan balance, if you, as the borrower, are unable to meet your home loan’s repayments. If this occurs and the property is sold, any shortfall between the outstanding loan balance and the proceeds from the sale of the property will be paid to the Lender by the LMI provider.
It is important to note that LMI protects the lender against financial loss, not the borrower or guarantor. The insurance helps lenders broaden the net of who they are able to lend to by alleviating some of the risk. However, the premium must be paid by the borrower.
When Will You Need to Pay LMI and How Much Will It Cost?
In general, lenders require borrowers to take out LMI on any loan that you’ve saved less than 20% of the property’s purchase price as a deposit, although this can vary according to individual circumstances. In most cases you’ll have little choice in the matter as your lender won’t release the funds you need to buy your property unless you pay LMI.
The amount you’ll be required to pay will depend on the loan to valuation ratio (LVR), the price of the property and the total amount of the loan itself. The LMI premium is at the lender’s discretion.
LMI is a one-off cost, that is usually added to your home loan, or capitalised, so you don’t have to pay it upfront.
Advantages and Disadvantages of LMI
LMI can help you buy a property sooner if you haven’t had time to save the required deposit but otherwise meet lending requirements.
However, the downsides of LMI can be the cost itself – up to tens of thousands of dollars. The LMI also isn’t transferrable so if you decide to refinance your loan, you’ll have to terminate your original mortgage and negotiate a new loan arrangement and LMI policy.
How Can You Avoid Paying LMI?
If you can save for a bigger deposit, then there is a good chance you can avoid LMI. A larger deposit means you’d borrow less and therefore pay less interest over the course of your loan, but it also means delaying your purchase, which could mean rising property prices in a strong market. Paying LMI now could be cheaper than the extra dollars needed to secure a property in the future.
You can also avoid paying LMI by using a guarantor loan, whereby a guarantor provides a guarantee for the home loan which is secured by their property. In many cases this is where the parents assist, providing a limited guarantee for an amount which reduces the LVR to 80%.
LMI Calculations and More Detail
If you’d like assistance calculating LMI, want to know whether or not you’ll need to pay it or would like to know more about guarantor loans please Contact me today to find out more detail on LMI relating to your circumstances.