Introduction
Buying a home is a big investment, and it’s likely the largest purchase you’ll ever make. However, if you don’t have a 20% deposit, you may be required to pay lenders mortgage insurance (LMI). This insurance protects the lender if you default on your loan. In this article, we’ll explain what LMI is, how it works, and whether it’s worth it for you.
What is Lenders Mortgage Insurance?
LMI is a type of insurance that protects the lender if a borrower defaults on their home loan. It’s typically required when a borrower has less than a 20% deposit. LMI can be a one-time payment or added to the loan amount and paid off over time.
How LMI Works
When a borrower takes out a home loan with less than a 20% deposit, the lender is taking on more risk. LMI is designed to protect the lender in case the borrower defaults on the loan. If the borrower defaults and the lender has to sell the property, LMI will cover the shortfall if the sale price doesn’t cover the outstanding loan amount.
Who Pays LMI?
The borrower is responsible for paying LMI, but it’s important to note that it’s not designed to protect the borrower. Instead, it’s designed to protect the lender. The cost of LMI can vary, but it’s usually a percentage of the loan amount. The higher the loan amount, the higher the LMI premium will be.
When is LMI Required?
LMI is typically required when a borrower has less than a 20% deposit. However, there are some exceptions. Some lenders may require LMI if the borrower is self-employed or if the property is in a high-risk area. It’s important to check with your lender to see if LMI is required in your situation.
How Much Does LMI Cost?
The cost of LMI can vary depending on a number of factors, including the loan amount, the loan-to-value ratio (LVR), and the lender. Generally, the higher the LVR, the higher the LMI premium will be. As a rough guide, LMI can cost anywhere from 1% to 5% of the loan amount.
Is LMI Tax Deductible?
LMI is not tax-deductible for borrowers. However, it may be tax-deductible for property investors who are using the property to generate income. It’s important to speak with a tax professional to determine whether LMI is tax-deductible in your situation.
Pros and Cons of LMI
Like any financial product, LMI has its pros and cons. Here are some things to consider:
Pros:
- Allows borrowers to purchase a home with a smaller deposit
- Can help borrowers avoid paying rent while saving for a larger deposit
- May be cheaper than waiting to save a larger deposit in some cases
Cons:
- Adds to the cost of the loan
- Does not protect the borrower
- May be difficult to cancel or remove
How to Avoid LMI
The best way to avoid paying LMI is to save a 20% deposit. This can take time, but it will save you money in the long run. If you’re unable to save a 20% deposit, you may be able to borrow from family or use a guarantor. A guarantor is someone who uses their own property as security for your loan.
How to Cancel LMI
Once you have paid off enough of your loan to reach an LVR of 80%, you may be able to cancel your LMI. However, this can be difficult. Some lenders may require a valuation of the property, and there may be fees involved. It’s important to speak with your lender to understand the process for cancelling LMI.
Conclusion
Lenders mortgage insurance can be a useful tool for borrowers who don’t have a 20% deposit. However, it’s important to understand the costs and limitations of LMI before signing up. If you’re considering LMI, speak with your lender and a financial advisor to determine whether it’s the right option for you.