You might have heard of Lenders Mortgage Insurance, often just called LMI. It can be a great option to help you purchase your property sooner, but there are also costs to consider. We’re here to make it as easy as possible for you to understand your options, so you can feel confident about your home loan and make the right choice for you.
Our beginners guide to LMI
Buying a home is a big investment and saving for your deposit is an important first step. When it comes to getting your loan, the amount of your deposit may impact whether LMI is required. What exactly is LMI, what does it cost and why would you need it? Let’s walk you through LMI.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance protects your lender against the risk of lending to you. If you default on your loan and your lender needs to sell your property, they’re covered if the amount they receive from the sale of your property is less than the total amount still owing on your loan. In other words, it’s an insurance policy so the bank won’t be out of pocket if things don’t go to plan.
When do I need LMI?
Lenders compare the value of your home with the amount of your loan to help them assess the risk of your loan. It’s called Loan to Value Ratio, or LVR for short. Lenders Mortgage Insurance is generally only required if you need to borrow more than 80% of the value of your home (that’s more than 80% LVR), as your loan is a greater risk to your lender. There may be other circumstances where LMI is also required.
What LMI isn’t
LMI shouldn’t be confused with Mortgage Protection Insurance or Credit Protection Insurance which may cover your mortgage repayments in the event of death, sickness, unemployment or disability. These insurances cover you personally whereas LMI covers your lender, although you do still cover the costs.
Here’s an example of how it might work in action.
Brian and Abi have found a home they want to buy for $500,000. Typically, they would need a 20% deposit ($100,000) to secure a loan from the bank. However, Brian and Abi only have $50,000 saved for a deposit. As they have sufficient income to support the loan, by purchasing Lenders Mortgage Insurance they can borrow $450,000 to buy a new home. This means they can secure a home loan sooner with a 10% deposit ($50,000) and stop paying rent.
Understanding your costs
What does Lenders Mortgage Insurance usually cost?
LMI isn’t one size fits all – it’s calculated based on how much you borrow. Typically, the higher your LVR, the greater the cost of LMI. If LMI applies, your lender will advise how much it will cost and discuss your options.
How is Lenders Mortgage Insurance paid?
LMI is a one-off cost that’s paid to the LMI provider (through your lender) at settlement. You can pay it up front or capitalise it to your loan, meaning it’s added to your total loan amount and repaid over time as part of your loan repayments. Capitalising it to your loan is an easy way to avoid an extra cost at the start of your loan, but it does mean you’ll pay more in interest over time as it increases the amount of your loan.
Step 3: Deciding if LMI is right for you
Choosing to get a loan with LMI is a personal decision. LMI allows you to reduce the deposit you need to get a home loan, but you should always consider what best suits your circumstances.
What difference can using LMI make?
Lenders Mortgage Insurance might allow you to:
- purchase a home sooner by taking out a home loan with a smaller deposit
- borrow a loan amount in excess of 80% LVR
- enter the housing market and start growing equity
- stop paying rent
- have greater flexibility through your home buying journey
What else is there to know?
LMI is a non-refundable cost. So even if you reduce your LVR below 80% after settlement or you pay off your loan early, you’re still liable for the full LMI cost.
Are there other options to Lenders Mortgage Insurance?
Remember, LMI typically only applies if your LVR is greater than 80%. So, if you’d like to avoid LMI, you should aim to save a deposit that’s 20% of the value of the property you want to buy. Just don’t forget to factor in also saving for extra costs you may need to cover, such as stamp duty and conveyancing fees.
If you don’t have a 20% deposit, you may be able to avoid LMI if you have a guarantor – someone (like a family member) who agrees to guarantee your loan repayment. That means they are liable for the loan if you default.
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