Lenders Mortgage Insurance
Saving for your dream home can take several months or even years. And when you save up enough and go into the market hunting for that perfect house, you may come across several other costs you will have to pay. One could be Lenders Mortgage Insurance (LMI) which will vary depending on how much deposit you have.
What is LMI?
Lenders Mortgage Insurance is an insurance policy that protects the lender against any financial losses if you (the borrower) cannot pay the loan repayments. Often LMI is mistaken for mortgage protection insurance, which covers you (the borrower) for your mortgage in any case of unemployment, death or sickness.
If your lender asks you to take out LMI, you can pay it right away, or you can add it to your home loan. LMI Premium is essentially non-refundable, which means that if you decide to switch to a different lender, you will not transfer your LMI to them. This situation could lead you to pay for a new policy through your new lender.
LMI decreases the lenders’ risks, which can allow financial institutions to grant larger amounts for lending. Moreover, it can also become a factor in approving more home loan applications.
When should I pay LMI?
If your home loan deposit is less than 20% of the property value, then the lender will require you to pay for LMI. Lenders usually have their own rules. One lender’s LMI policies can be different from another lender; hence, as a suggestion, please check out individual lenders’ LMI policies.
Check out the useful tips below for some LMI cost saving suggestions.
What factors can affect my LMI cost?
· Size of the home loan – The higher the home loan amount you borrow, the greater the financial institutions’ loss in the event you default.
· Deposit amount – A higher deposit will attract a small LMI cost, while with a larger deposit, you will incur a lower LMI cost. For instance, if your home deposit is 7%, you would pay more LMI cost than someone whose deposit is 15%.
· Investment or residential property – Financial institutions may sometimes differentiate between an investment and a residential property when LMI costs are calculated.
To calculate your LMI use this LMI Calculator
Tips on how to reduce LMI costs
- Increase your deposit – If the deposit to purchase a property is less than 20% of the purchase price, banks will ask borrowers (you) to take out Lenders Mortgage insurance, which helps Bank protect against any non-payment (Default) on the home loan. You can still purchase property with as little as a 5% deposit. However, LMI rates are much higher when the deposit is minimum, i.e. 5% and keeps decreasing as the deposit increases. Try to get to 12% deposit as the LMI rate drop significantly (you will still pay LMI, but it won’t hurt as much as it hurts under 12%).
- Family members as guarantor – Introduce one of your family members, i.e. Parent or a Direct Sibling, as guarantor; in case you aren’t able to come up with 20%. The lender will use their equity and allow you to borrow up to 100% or even more to cover expenses like stamp duty and any renovations etc.
- Compare LMI quotes – LMI cost can differ between lenders. Hence, it is advisable to contact lenders and compare the LMI costs.
- Check with Lenders special offering – From time to time, lenders come up with special offers, i.e. No LMI with a 15% deposit; of course, they have T&C’s with it.
If you are a professional, i.e., doctor, lawyer, accountant, etc., then there are quite a few banks that do not charge LMI with only a 10% deposit.