LMI Explained: Everything You Need to Know About Lenders Mortgage Insurance
If you’re buying your first property, Lenders Mortgage Insurance (LMI) is an important concept to learn before you sign on the dotted line. LMI is an added expense for a home purchase where less than a 20% deposit can be contributed, but on the bright side it makes it possible for more people to achieve the great Australian dream and actually buy a property.
We’ll look at what LMI is, how it works, and how much you’d have to pay. Finally, we’ll examine how you should take the next step towards buying your dream home.
What is LMI and What is it for?
In particularly lean times such as COVID-19, hopeful homebuyers may find it difficult to save a substantial down payment for their mortgage. This is in addition to the fact that incomes are not increasing as substantially as house prices are. As a result, this has meant saving for a 20% deposit has been difficult for Australians. This doesn’t take them out of the running to buy a home though.
LMI was designed to give people a chance to buy property with less. The purpose of this insurance policy is to protect the lender, but it’s the property owner who pays for it. The policy is essentially there to protect the lender should they take a loss if you were to default on repayments. For instance, between the time of purchase and the time the home is repossessed if a person defaults, the value of the property may fall, which causes the lender to suffer a loss.
LMI is not to be confused with mortgage protection insurance. The difference is that mortgage protection insurance protects the borrower if they can’t pay their mortgage under certain circumstances, while LMI protects the lender, hence the name “Lenders Mortgage Insurance”.
When do I Have to Pay LMI - Or How Do I Avoid it?
LMI is usually required when your loan-to-value ratio is higher than 80%. So if you can only have 8% saved for the down payment, you would likely need to pay for LMI which is generally capitalised onto your loan amount. However, there are some exceptions. For example, certain professional groups, such as accountants, doctors, and lawyers who can borrow up to 90% without having to pay LMI.
You can also check to see if someone will be your guarantor. This is a person, usually a parent or relative, who will secure your property with their property. In some cases, you might be able to borrow up to 100% of your purchase whilst also avoiding LMI.
And in an effort to encourage more people to buy a property, some first-time homeowners can avoid LMI if they’re eligible for the first home loan deposit scheme. This allows you to pay with a deposit as low as 5% and save yourself the costs of an LMI premium.
One of the best benefits of using a broker is that we can do all the legwork for you when it comes to comparing costs with many lenders. LMI premiums are like all insurance premiums in that they can vary across the spectrum of lenders. Your quote will depend on the amount of the loan as well as the property value. The alternative is to save for a bigger deposit, which in today’s climate can certainly be challenging.
How Much LMI do I Have to Pay?
LMI will be based on both your risk levels, the price of the home, and the amount of the loan. The higher all of these things are, the more you’ll pay.
Below is an illustration of just how costly LMI can be:
Source: Quotes taken from Genworth LMI premium calculator, correct as at 14 September 2020. Premiums listed are for non-first home buyers (owner-occupiers) borrowing with a loan term of up to 30 years and excluding stamp duty.
If you need help calculating the LMI on a specific property and scenario, Shore Financial’s team of experts can provide you with everything you need.
Whether the benefits of LMI outweigh the costs will depend on your situation. Maybe you have the opportunity to buy an incredible property at a discounted price. Maybe you have a more lucrative investment opportunity that will generate more revenue than the costs of LMI.
Here are a few steps that you should take before deciding:
- Decide how much LMI you’re willing to pay based on both your deposit amount and larger financial goals.
- Start looking at how different lenders charge for LMI and what your rates are likely to be.
- Find a partner you can talk to before making major decisions. Shore Financial is a trusted partner for home buyers and property investors.
LMI isn’t for everyone, but at times, paying it could be a quicker way to buy the house of your dreams, and get your foot on the property ladder. If you have questions about purchasing for a first home or property investment, call Shore Financial today to learn more about our services.