Buying your first home is a big milestone in your life, but it can also be a daunting process. One of the biggest challenges for first home buyers is getting a mortgage, and one of the things that can make it even more difficult is the requirement for lenders mortgage insurance, or LMI.
What is Lenders Mortgage Insurance?
Lenders mortgage insurance is a type of insurance that lenders take out to protect themselves in case the borrower defaults on their loan. It is usually required if you have a deposit of less than 20% of the purchase price of your home.
While LMI is designed to protect the lender, it can also benefit the borrower by allowing them to get a home loan with a smaller deposit. However, it is important to understand the costs involved and how it works before you decide to go down this path.
How Does Lenders Mortgage Insurance Work?
LMI is usually a one-off payment that you will need to make when you take out your home loan. The cost of LMI will depend on a number of factors, including the size of your deposit, the value of your home, and the lender you are borrowing from.
It is important to note that LMI does not protect you as the borrower – it only protects the lender. If you default on your loan, the lender will be able to claim the amount of the outstanding loan from the insurer.
What Are the Benefits of LMI?
One of the main benefits of LMI is that it allows you to get a home loan with a smaller deposit. This can be particularly helpful for first home buyers who may not have a large amount of savings.
Without LMI, lenders would be less likely to offer home loans to people with small deposits, as they would be taking on a greater risk. By taking out LMI, lenders are able to offer home loans to a wider range of people, including first home buyers.
What Are the Costs of LMI?
The cost of LMI can vary depending on a number of factors, including the size of your deposit, the value of your home, and the lender you are borrowing from.
Generally, the cost of LMI will be calculated as a percentage of the total loan amount, and this can range from around 1% to 5% of the loan amount. This can add up to thousands of dollars, so it is important to factor this into your budget when you are planning to buy your first home.
Can You Avoid LMI?
If you have a deposit of 20% or more of the purchase price of your home, you may be able to avoid LMI altogether. This is because lenders will see you as less of a risk if you have a larger deposit, and they may be willing to offer you a home loan without requiring LMI.
However, if you do not have a large deposit, you may still be able to avoid LMI by using a guarantor. A guarantor is someone who agrees to guarantee your home loan, which means that if you default on your loan, the guarantor will be responsible for the outstanding amount.
What Should You Consider Before Taking Out LMI?
Before you decide to take out LMI, there are a number of things you should consider:
- How much will it cost?
- What impact will it have on your home loan repayments?
- How long will you be paying for LMI?
- Are there any other options available to you?
It is important to do your research and speak to a professional before making any decisions about LMI.
Conclusion
Buying your first home can be a challenging process, but with the right information and support, it can also be an exciting and rewarding experience. If you are a first home buyer and are considering taking out LMI, it is important to understand the costs involved and how it works before making any decisions.
By doing your research and speaking to a professional, you can make an informed decision about whether LMI is the right option for you. Remember, there are other options available, such as saving a larger deposit or using a guarantor, so it is important to explore all of your options before committing to LMI.