Lenders’ Mortgage Insurance, or LMI for short, is a type of insurance that protects the financial interests of the lender. Unlike Mortgage Protection Insurance, which insures borrowers for mortgage repayments, LMI is meant to be a safeguard for lenders in the event that a borrower defaults on their home loan and can no longer meet their repayment commitments.
Although the lender may repossess the property in question if a borrower defaults on their home loan, LMI shields the lender against the risk that the value of the property has decreased.
LMI applies when an individual takes out a home loan, or refinances an existing home loan, with anything less than a deposit equivalent to 20% of the value of the property. In other words, you pay LMI when you borrow more than 80% of the value of a property.
What Should I Know About LMI?
As many as 70% of households believe LMI covers borrowers. But LMI is designed to protect the lender only. The lender will typically organise this insurance on your behalf, but since it affords them some financial protection, lenders are generally more receptive to approving loans at a higher loan-to-value (LVR) ratio, which could be as high as 95% LVR.
LMI may be paid as a one-off sum when your loan settles, or added to the total value of your loan, which means higher monthly repayments and higher interest expenses over time. In either case, LMI can add thousands of dollars to your budget when you buy a property, and it is also subject to stamp duty and taxes.
The amount you pay in LMI will depend on your individual circumstances, including the following:
Location of the property
The lender’s policies
Value of the loan
The size of your home loan deposit
Loan-to-Value ratio
Your type of employment
Whether the property will be owner-occupied
Any government grants and savings
Our expert team can work with you to navigate this complex field and help you understand the costs of LMI.
Can I Reduce or Avoid LMI?
If you want to cut down on LMI, or avoid it altogether, you will typically need to save a bigger deposit. With that said, some lenders will waive LMI requirements if they implement their own ‘risk fee’.
Alternatively, you might be eligible to avoid LMI if you either have a guarantor to back your loan, you work in a medical or legal profession that qualifies for no LMI up to 90% LVR, or you successfully apply for a government grant through the First Home Loan Deposit Scheme.
On the plus side, paying LMI may allow you to enter the market sooner, either to take advantage of a unique opportunity that presents itself, or favourable growth in property prices. After all, it’s not so easy to set aside tens of thousands of dollars for a deposit.
Just because LMI doesn’t provide you with any cover, it doesn’t necessarily mean you should hold off purchasing a property if it will take you time to save for a 20% house deposit. But keep in mind, LMI still requires a mortgage insurer to review your home loan application.
That’s why it pays to talk with one of the mortgage brokers from the Growthfront team, as we can suggest the best options to fasttrack your home loan approval.
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