If you are in the process of buying a property, you may have heard that Lenders Mortgage Insurance (LMI) may be required if you are planning on taking out a home loan with your bank.
However, if this is your first time buying a home, you may be wondering what LMI is?
An LMI meaning is basically an insurance policy you are required to pay if your total home deposit is less than 20% of your property’s “lender assessed value”.
This is due to the fact that borrowers with a loan-to-value ratio (LVR) greater than 80% are often considered to be a greater risk.
This is designed to protect the lender in the event that you are unable to continue to service your home loan for some reason.
If someone defaults on a home loan but they have paid LMI, the lender will be protected from any financial loss it may incur in the future when the property is sold to recover the remaining balance on the home loan.
Read on to delve deeper into what LMI is and how it can impact you as a borrower.
What Does LMI Protect?
Lenders Mortgage Insurance (LMI) is a form of insurance that a banking institution or lender will take out to insure themselves against the possibility of a home loan not being repaid, if you, the borrower, are unable to meet your loan payments and the property is sold for less than the outstanding loan balance.
Lenders Mortgage Insurance is designed to protect the lender and not the borrower.
Lenders believe that they are effectively taking a bigger risk lending to someone who doesn’t have the entire 20% deposit of the home purchase saved up.
LMI works by providing financial protection to the lender for the entirety of that home loan (which can be up to 30 years).
The cost of the Lenders Mortgage Insurance premium is normally passed along to the borrower as an extra fee on top of their usual home-buying costs.
Borrowers often pay the fee upfront and will often absorb this cost into their overall loan amount.
LMI is different from Mortgage Protection Insurance, which is designed to protect borrowers and their ability to service their mortgages in the event of death, sickness, disability, injury or unemployment that could impact their ability to pay their mortgage successfully.
Does Lenders Mortgage Insurance Do Anything for Me?
While LMI primarily protects lenders, there are a variety of benefits for borrowers that should not be overlooked.
The primary benefit of LMI is the fact that it enables borrowers to access home loans from lenders when they meet the lending requirements, but do not have the required deposit saved up.
A standard deposit is typically 20 per cent of the purchase price of the home, which can be a large sum to save.
Often, depending on using the price of the home, a 20% deposit can end up being into the hundreds of thousands of dollars, which is understandably a substantial sum that many would struggle to save.
You may be wondering what an LMI home loan is.
LMI allows borrowers to buy a home with a smaller deposit, potentially getting them into the housing market a lot sooner than if they waited until they had the entire amount saved.
This can end up saving you money in the long run, especially if home values are on the rise.
The sooner you get onto the property ladder, the sooner you can start taking advantage of the increase in property value compared to your loan.
This is essential for many individuals who would otherwise be unable to successfully attain a loan as property prices continue to rise, causing the needed deposit to be higher.
Do I Need LMI?
Unfortunately, you as an individual are not able to decide whether or not you will pay Lenders Mortgage Insurance.
Whether or not you end up having to pay LMI will depend on a variety of factors including:
• The size of your down payment compared to the price of the home you intend to buy. Generally, an amount that is less than 20% of the assessed value will result in an LMI of some amount.
• Your lender. It is up to the lender whether or not they wish to include LMI as part of your home loan offer. They will discuss your options with you and inform you of why you are or are not being charged LMI and how much the insurance is going to cost you.
If you really do not want to pay LMI as well as your home loan, your next option is to ensure that you have the entirety of the 20% down payment saved up for the home deposit.
Are there ways to avoid paying LMI?
Now that you have answered what LMI is, you may be wondering if there is any way that you can avoid having to pay it.
There are ways that you can avoid Lenders Mortgage Insurance, but these may not be suitable for everyone or every personal circumstance.
Borrowers may be exempt from paying LMI if:
• They get a government grant: depending on what state you are in and what type of home you are buying or building, you may be eligible to receive a government grant to go towards the total price of your home.
This could include the First Home Owners Grant or the First Home Buyers Grant as an example. Often, these grants are included in the total deposit price of your home.
Depending on the size of your deposit, you may be able to use a grant to reach that 20% deposit or at the very least get close to it which can help reduce the LMI costs.
Additionally, the First Home Loan Deposit Scheme allows you to put down a 5% deposit and borrow up to 95% of the home value and have the LMI paid by the government.
• Guarantor: many lenders will choose to waive the LMI if the borrower is backed by a good guarantor who legally accepts responsibility for the loan if the borrower cannot make their payments for some reason.
• Research your lenders: always do your research before you settle on a specific lender as they all have different lending rules and offers.
Some lenders offer reductions in their LMI fees to help you get into your home sooner, while others may waive them completely for a period of time.
How Much Does LMI Cost?
Lenders’ Mortgage Insurance costs are going to be entirely dependent upon a variety of personal factors.
No two contracts are going to be the same and as such it is difficult to determine the exact cost of your LMI before you talk to a lender directly.
Generally, your LMI is going to be influenced by several factors, including:
• The price of the property that you wish to buy – larger home loans are going to attract higher LMI fees
• How much money you have managed to save up for your deposit – the lower your saved down payment is, the higher your LMI costs are going to be
Lenders can provide you with an LMI calculator if you ask them to.
Many lenders will allow you to borrow up to 95% of the purchase price of your home.
However, keep in mind that if you choose to take out a loan for 95% of the value of your home you are not only going to pay a much higher LVI, but you are also going to end up with higher monthly repayments and more interest paid over time.
So, always consider whether higher LVI costs and overall loan costs are appropriate for your financial situation first if you do only have a smaller deposit.
Summary
If you find yourself asking what is LMI, you’re not alone.
In summary, Lenders Mortgage Insurance is an insurance that is designed to cover lenders if there is an issue with you paying back your home loan.
This ensures that your lender does not come up short and that any risk associated with lending to a specific individual is covered.
LMI is incredibly important in the home loan industry as not only does it cover lenders, but it allows many Aussies to get into the property market and into their dream homes much faster than if LMI wasn’t an option.
By helping the everyday Australian purchase property with as little as 5% of the home value, it can help lock in a home price before they continue to get more expensive and block a lot of people out of the market.
If you are planning on buying a property soon and would like to take advantage of Lenders Mortgage Insurance to help you get into your home sooner and with a smaller deposit, we can help you out.
Get in touch (https://www.pherrus.com.au/contact-us/) with our team of experts today and we will be able to provide you with further information about LMI, how it can impact your purchasing process, and how much it might end up costing you.
Call our team today for expert advice and assistance.