If you’re planning to buy a home and you don’t have a 20% deposit saved, you’ll likely need to pay Lenders Mortgage Insurance (LMI). This insurance protects the lender if you default on your loan, and it can add thousands of dollars to your home loan. Here’s what you need to know about LMI.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is an insurance policy that protects the lender if the borrower defaults on their home loan. It’s typically required when the borrower has a deposit of less than 20% of the purchase price of the property.
The insurance is paid by the borrower, but it’s designed to protect the lender. If the borrower defaults on their loan, the lender can make a claim on the insurance policy to recover their losses.
How Much Does LMI Cost?
The cost of LMI varies depending on the size of your deposit, the value of the property, and the lender’s requirements. Generally, the smaller your deposit, the higher the LMI premium will be.
As a rough guide, LMI can add around $5,000 to $10,000 to the cost of a $500,000 home loan with a 10% deposit. The exact cost will depend on your individual circumstances.
Is LMI Worth the Cost?
Whether or not LMI is worth the cost will depend on your individual circumstances. If you don’t have a 20% deposit saved, paying LMI may be the only way to get into the property market. However, it’s important to consider the additional cost of LMI when calculating your budget.
It’s also worth noting that LMI doesn’t protect the borrower – it only protects the lender. If you default on your loan, you’ll still be responsible for the outstanding debt, and you may face additional fees and charges.
Can LMI Be Avoided?
If you don’t want to pay LMI, you’ll need to save a larger deposit. Saving a 20% deposit will allow you to avoid LMI and may also give you access to lower interest rates.
If you’re struggling to save a 20% deposit, there are a few other options to consider. Some lenders offer Family Guarantee loans, where a family member can use their property as security for your loan. This can help you avoid LMI and get into the property market sooner.
How is LMI Calculated?
LMI is calculated based on the size of your deposit, the value of the property, and the lender’s requirements. Generally, the smaller your deposit, the higher the LMI premium will be.
The LMI premium is a one-off payment that is added to your home loan. This means that you’ll be paying interest on the LMI premium over the life of your loan.
How is LMI Paid?
The LMI premium is usually paid as a one-off payment at settlement. This means that it will be added to your home loan, and you’ll be paying interest on the premium over the life of your loan.
Some lenders may allow you to pay the LMI premium upfront, which can save you money in the long run. However, this option may not be available with all lenders.
What Should You Consider Before Paying LMI?
Before deciding to pay LMI, it’s important to consider the additional cost and whether it’s worth it for your individual circumstances.
You should also consider whether you’ll be able to afford the ongoing repayments on your home loan, including the interest on the LMI premium.
If you’re struggling to save a 20% deposit, you may want to consider other options, such as a Family Guarantee loan or a lower-priced property.
What Are the Alternatives to LMI?
If you don’t want to pay LMI, there are a few alternatives to consider:
- Save a larger deposit
- Use a Family Guarantee loan
- Choose a lower-priced property
- Consider a different lender with lower LMI premiums
What Are the Benefits of LMI?
The main benefit of LMI is that it allows you to get into the property market sooner, even if you don’t have a 20% deposit saved. This can be particularly helpful if property prices are rising quickly and you want to get in before they become unaffordable.
LMI can also help you avoid the need to save for years to reach a 20% deposit, which can be difficult for some people.
What Are the Risks of LMI?
The main risk of LMI is the additional cost. LMI can add thousands of dollars to your home loan, and you’ll be paying interest on the premium over the life of your loan.
If you default on your loan, you’ll still be responsible for the outstanding debt, and you may face additional fees and charges. LMI only protects the lender, not the borrower.
How Do You Apply for LMI?
If your lender requires LMI, they will arrange it for you. You’ll need to provide some information about your income, employment, and financial situation to the insurer.
The LMI premium will be calculated based on this information, and it will be added to your home loan at settlement.
What Happens if You Want to Refinance?
If you want to refinance your home loan, you’ll need to apply for LMI again if your new loan is for more than 80% of the value of the property.
This means that you’ll need to pay another LMI premium, which can add thousands of dollars to the cost of refinancing.
What Happens if You Sell Your Property?
If you sell your property, the LMI premium is non-refundable. This means that you won’t receive a refund for any of the premium you’ve paid.
If you sell your property and buy another one, you’ll need to pay LMI again if your new loan is for more than 80% of the value of the property.
Conclusion
Lenders Mortgage Insurance can be a helpful tool for getting into the property market sooner, even if you don’t have a 20% deposit saved. However, it’s important to consider the additional cost and whether it’s worth it for your individual circumstances.
If you’re struggling to save a 20% deposit, consider other options such as a Family Guarantee loan or a lower-priced property. And if you do decide to pay LMI, make sure you can afford the ongoing repayments on your home loan, including the interest on the LMI premium.