No LMI
Why do they charge LMI?
Lenders Mortgage Insurance or LMI for short is insurance for your lender in the event that you can’t repay your loan.
This insurance allows them to approve loans that in the past were considered too risky and were declined!
Unfortunately for you they pass the bill for the LMI premium on to you, the borrower. This comes in the form of a one off fee when your loan is advanced. Often the premium can be “capitalised” or added on top of the amount you are borrowing.
What is a “safe” loan to the bank?
Low doc loans are considered safe if you are borrowing less than 60% LVR (60% of the property value). If you borrow more than 60% but less than 80% then this is considered to be unsafe, so the lender will obtain LMI and ask you to pay a premium. Lending more than 80% is considered to be extremely risky and so the LMI premiums tend to skyrocket!
Risk fee or LMI, what is the difference?
Did you know that some lenders effectively “self insure” their loans by charging a risk fee instead of obtaining LMI? This means there is no external mortgage insurer, however you still have to pay them a fee anyway!
Low doc loans have different LMI premium rates than full doc loans and different lenders have different premiums so there is no hard and fast rule as to what you will pay. The same can be said for risk fees which vary wildly between lenders and go by a variety of names. Contact a good mortgage broker to find out if LMI or a risk fee is cheaper for your low doc home loan.
Get the lender to pay your LMI for you!
The LMI premium doesn’t always come as a once off fee payable when your loan is settled. Some lenders will pay the fee for you and increase your rate to compensate. What you should do is calculate how long you will have the loan for, then work out if it is cheaper to have a higher rate or a once off fee.
Many borrowers prefer to have a higher rate so that they don’t have to pay the extra fee when buying a property which would reduce the amount they have available for a deposit.
Apply for a low doc with no LMI
If you are lying about your income to obtain a loan then do not apply for a low doc loan. You will only hurt yourself. We strongly recommend that you complete a self assessment of your income and your ability to repay a loan before applying for a new home loan.
