While researching home loans, you may have come across the term Lenders Mortgage Insurance or LMI, but what does it mean?
What is Lenders Mortgage Insurance (LMI)?
LMI is essentially an insurance policy that the borrower pays for to ensure the bank is covered if you default your home loan. Some people initially think it’s an insurance policy to cover their mortgage repayments if they enter a financial struggle, but this is incorrect.
Lenders take out the insurance cover in order to be able to lend borrowers who have a smaller deposit (i.e. generally when the amount you are lending is more than 80% of the value of the property). Smaller deposits are a higher risk for lenders, so LMI allows you to borrow more to buy the special home or investment property you’ve been working so hard to purchase.
When do you need to pay it?
The premium is usually passed onto the borrower and added to the loan amount.
How much will it cost?
The amount of LMI charged varys greatly. It’s based on how much you are borrowing, the value of the property and how high the loan is against the property value. This means mortgage insurance would be higher if you borrowed 90% of the property value compared to 85%, however a LMI of 85% on a property worth $900,000 is higher than a LMI of 85% on a property worth $750,000.
What happens if you refinance the mortgage?
LMI is lender specific and not portable. This means that if you decide to refinance your loan with another lender you are still borrowing above 80% of the property’s value. This will most likely cause you to pay for LMI again. Even if you paid it earlier, remember you insured the lender who borrowed the initial amount. The second lender you refinance with will likely ask you to insure them with LMI as well. (If the loan amount remains above the 80% of the property’s value). Be mindful of this before considering big financial decisions.
Lenders Mortgage Insurance – is it really worth it?
Buying real estate is an excellent investment strategy to achieve your financial independence, but we suggest you consider your borrowing capacity before proceeding to shop for a property. You really need to assess what you can borrow, how much it will cost you to get that loan amount and can you afford the ongoing repayments.
Some people are quite ok in paying the LMI as they feel being in the property market is worth the cost. These type of people feel it may take longer to save more money and avoid mortgage insurance, while others may see that this is an indication that they aren’t quite ready to buy or expand their property portfolio. There are various strategies you can consider to avoid LMI, including paying a 20% deposit of the property’s value, having a guarantor use their home as equity or obtaining a gift (cash) to help keep that loan amount under 80%. These are only ideas and need to be implemented carefully. All strategies provide advantages and disadvantage, so we strongly recommend seeking advice from a financial planner. A finance broker can provide factual information around the effects of each strategy, but a financial planner can review your situation and provide appropriate & qualified advice.
If you want to learn more, please feel free to contact us at any stage.
While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you want to learn more, please contact us. We welcome the opportunity to assist you.
Feb 2018
