Saving for a home is no easy task. In addition to the deposit amount, you also need to factor in a number of additional costs you may incur. Depending on the size of your deposit, one of these costs might be Lenders Mortgage Insurance (LMI)
What is LMI and how does it work?
LMI is an insurance policy that some borrowers need to pay for. The purpose of LMI is to protect the lender from financial loss if the borrower can’t afford to meet their home loan repayments.
If the borrower defaults on their loan and the sale of the property doesn’t equal the unpaid value of the mortgage, lenders can claim on the LMI policy to make up the difference.
Many people believe that LMI is designed to protect the borrower in the case of loan default, but this is actually mortgage protection insurance, which is a different product. The true purpose of LMI is to protect and potentially benefit the lender. Additionally, by reducing the risk to the lender, LMI can allow banks and other financial institutions to lend larger amounts and approve more home loan applications.
When is LMI required?
Generally a lender will require you to pay for LMI if your home loan deposit is less than 20% of the total value of your property. If you’re looking to avoid paying LMI, but don’t have a 20% deposit saved up, you may need to look for a guarantor. This could be in the form of a family guarantee loan or if you’re a first home buyer you may be eligible for the Federal Governments First Home Loan Deposit Scheme.
What effects the cost of LMI?
There are a few factors that may affect the cost of LMI. These could include:
- The size of your home loan
- Your deposit amount
- Whether the property is for investment purposes or to live in
- Whether you are a full-time or casual employee
- The insurer used by the financial institution
What does LMI Cost?
How much LMI actually costs will depend on a range of factors, including your deposit amount, the value of the property you’re buying and your lender’s risk assessment of you as a borrower.
For example, if a first home buyer had a 10% deposit for property valued at $400,000, their estimated LMI payment would be $6, 336. If the same buyer only had a 5% deposit, their estimated payment would be $12, 578.
Talk to MC Mortgage Solutions today about LMI and ways that you can potentially avoid having to pay it or click here to get started today.