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If your deposit is any less than 20% of the property purchase price, Lenders Mortgage Insurance (LMI) is usually charged. Because LMI is typically paid at settlement with all the other lender and government charges, you’ll need to plan for paying this additional cost on top of your deposit.
What is Lenders Mortgage Insurance?
The top tip to know about LMI is that it insures the lender, not you. It is insurance taken out by the lender, and the cost is on-charged to you. If you default on your loan payments and the property ends up selling for less than the outstanding loan balance, LMI will cover the lender for the gap. You will still be liable to pay the shortfall to the mortgage insurer.
How much is LMI?
LMI is calculated as a percentage of the loan amount. It works on a tiered basis, so as your loan size and Loan to Value Ratio (LVR) increases, the cost of LMI will go up in stages.
You may find the cost of LMI varies dramatically between lenders, depending on their criteria and the insurance provider they use. Factors that might be considered when calculating LMI include:
- Loan type
- Whether the property is owner-occupied
- Whether you are buying off the plan
- Do you have genuine savings?
- Are you self-employed?
Here’s an example of how much you could expect to pay:
You have a 10% deposit of $50,000 for a property you want to purchase for $500,000. At current rates and a standard loan, the LMI costs could be around $9,585. To find out more, click here.
Speak to your Yellow Brick Road local representative for a more accurate quote and for detail about how LMI policies differ between specific lenders.
Get it right from the start with professional help.
How is LMI paid?
You may have the option to pay the LMI premium as a lump sum payment when your loan settles, but more commonly the cost is added to the principal of the loan. What this means is that you’re borrowing the LMI cost and paying it back as you make mortgage repayments – with interest added.
If you switch lenders, there’s a good chance you’ll end up paying LMI twice. Your new lender will need to insure against risk when you borrow more than 80% of the value of the property, just as your previous lender did.
Can you avoid paying LMI?
Apart from keeping your Loan to Value Ratio below 80%, another way to avoid paying LMI is to take out a family guarantee. If you have a family member willing to act as guarantor on your home loan, you can potentially purchase a property with a Family Guarantee Loan.
Otherwise known as Family Pledge Loans, they allow the equity in your guarantor’s property to be used as security on a home loan. The security on the new loan can be split, and the guarantee limited to a portion, which is then added to your deposit amount.
In some cases, LMI is waived for low-risk borrowers. Certain professions are considered favourably, such as doctors, accountants, lawyers and engineers, when combined with other factors like secure full-time employment, stable housing history, decent credit rating and evidence of genuine savings.
What’s good about LMI?
LMI can help you get into the property market sooner with a deposit as low as 5% of the purchase price. Because LMI allows for a smaller deposit and a larger loan ratio, it gives you the means to buy the property you want rather than missing out.
Your Yellow Brick Road mortgage broker can help you weigh up the pros and cons of using LMI or waiting until you’ve accumulated a 20% deposit. Give us a call today.