You may have heard of Lenders Mortgage Insurance (LMI) before but what does it mean when it comes to getting a home loan?
Well, not only can it cost you thousands of dollars upfront but it can actually stop you from borrowing altogether!
First introduced in Australia in 1965, LMI was initially designed as a way to help more Australians purchase their own homes using a smaller deposit.
The problem is that it’s hard to shop around for a price on LMI because banks don’t advertise the LMI rates and the two largest mortgage insurers, Genworth and QBE, make up around 80% of the market!
Here’s what else every borrower needs to know about mortgage insurance.
What does LMI do?
It protects lenders in the unfortunate event that you’re unable to make your mortgage repayments.
The reason that most lenders charge mortgage insurance is that there is a small risk of lenders not getting their money back when they lend it to a customer.
Although the property itself is used as security against the home loan, it may still not be enough to cover the outstanding debt if the property value declines.
LMI reduces this risk and allows lenders and banks to lend money to a broader spectrum of borrowers.
When do you need to pay LMI?
You’ll need to pay LMI if you’re borrowing over 80% of the property value.
If you’re self-employed, a contractor or simply can’t provide the standard income evidence for a standard home loan, you may need to apply for a low doc loan.
If that’s the case, lenders mortgage insurance is payable if you borrow more than 60% of the property value.
How much does it cost you?
This largely depends on how much you’re borrowing, which lender you choose and the size of your deposit.
For example, if you’re borrowing $450,000 on a $500,000 property (90% of the property value) in New South Wales, then you may have to pay an LMI premium of anywhere between $7,920 to $9,752.
Your LMI premium may be higher or lower: it all depends on which lender you choose.
You can use the LMI Calculator to estimate the mortgage insurance premium that you would pay with a range of lenders and insurers.
How can mortgage insurance be avoided?
It’s possible to get the lender to waive your LMI premium if you’re one of the following select professionals:
There are exceptions but other professionals will need to have a deposit of at least 20% to get their waived LMI.
Despite this, borrowers who don’t work in any of the above professions may be able to capitalise the premium or add it to the top of their loan.
For example, if you’re borrowing $270,000 on a $300,000 property, then your LMI premium may be around $2,500.
By capitalising the mortgage insurance premium, the lender will lend you an extra $2,500, bringing your final loan amount to $272,500.
The beauty of it is that you won’t have to pay this premium upfront, leaving you with more money in your pocket.
On top of that, you don’t actually pay interest on the mortgage insurance premium.
If you can’t get waived LMI, a mortgage broker can help you find the cheapest LMI premium available for your loan by comparing a number of different lenders and major banks.
We actually have more than 40 lenders to choose from, including the major banks, and strong relationships to get you a great deal on mortgage insurance.
Give us a call on 1300 889 743 or fill in our free assessment form to help you save money on LMI.