Ever found yourself unable to save enough deposit to avoid paying lenders mortgage insurance on a home loan?
Lenders mortgage insurance (LMI) protects lenders in the event that a borrower defaults on a loan. In most cases, you are required to pay LMI if you borrow more than 80% of the value of your property.
Some borrowers may find it difficult to save the 20% deposit necessary to avoid LMI, especially if property prices are rising.
Borrowers usually pay LMI upfront and the cost is usually part of their loan.
For example, if you borrow $500,000 and the LMI premium is $5,000, then you’ll receive $495,000 to pay for your home when your loan is advanced.
Now, Genworth gives borrowers the option to pay LMI monthly. This may allow some to buy a home sooner, because they can avoid having to save a 20% deposit. Only one lender in Australia can offer this option as of now but we expect more to get in on the act.
Upfront LMI Vs Monthly LMI
|Upfront LMI||Monthly LMI|
|What is it?||Pay a single premium when your home loan is approved.||Pay monthly premiums for the duration of your insurance coverage.|
|How will this affect my deposit?||You’ll need to save up a higher deposit, which may delay your dream of homeownership.||You won’t need as large a deposit, allowing you to buy a property sooner.|
|Will my home loan repayment be higher?||Home loan repayment may be higher, if you opt for capitalised LMI (see below).||There’s no impact on your home loan repayment, since the LMI premium is not capitalised into the loan.|
|How long do I need to pay LMI?||You pay one lump sum when the loan is taken out.||You pay premiums only until the Loan-to-Value Ratio (LVR) drops below 80%.|
There’s another option for paying LMI: LMI capitalisation.
Capitalising the LMI premium means you’ll be paying back the cost of the LMI as part of your home loan repayments.
Note: Not all lenders allow LMI capitalisation.
How do these options compare?
|Property price = $500,000
Loan amount = $445,000 (89% LVR)
Loan term = 30 years
Interest = 3.13% per year
|Upfront LMI||LMI Capitalisation||Monthly LMI|
|Home loan repayments (monthly)||$1,907||$1,941||$1,907|
|LMI repayment (monthly)||–||$34 (capitalised on loan amount)||$159|
|LMI premium payable||$7,878||$12,240 (capitalised on loan amount)||$3,816|
|Total interest charged||$241,693||$245,972||$241,693|
*The LMI premium excludes stamp duty
Your home loan repayment will increase slightly if the LMI is capitalised.
On the other hand, your home loan repayment will remain the same if you choose to pay LMI monthly.
But you’ll also be paying an LMI premium monthly until your loan-to-value ratio is down to 80%, after which your LMI payments cease. You’ll then be making only your loan repayments.
Do I qualify for monthly LMI premium?
You can qualify for the monthly LMI option even if you’re a first-home buyer or a property investor.
This option is available for both owner-occupied and investment property, on any loan where LMI would be applicable.
The lender will take into account the cost of the monthly premium to determine your ability to service the loan.
How can first-home buyers benefit?
- No need to save a 20% deposit
- Can move into your dream home sooner
- It can be a cheaper option if you intend to upgrade or refinance within about five years
- A greater portion of your loan can be used to buy your home, as the monthly LMI premium doesn’t affect your LVR.
How can property investors benefit?
- No need to save a 20% deposit
- Can purchase property sooner
- You can use the portion of your loan that could’ve been deducted while paying upfront LMI to invest in another property.
Want to get approved with a lower deposit?
Home Loan Experts can help! Speak with one of our mortgage brokers by calling 1300 889 743 or by completing our free assessment form today!