Buying a home is a significant investment, and for most people, it is the largest one they will ever make. However, not everyone has enough money saved up to afford the 20% deposit required by most lenders. This is where Lenders Mortgage Insurance (LMI) comes in. LMI is an insurance policy that protects the lender if you default on your loan. Unfortunately, there are many myths about LMI that can make it difficult for homebuyers to make informed decisions. In this article, we will debunk some of the most common myths about LMI and provide some tips on how to avoid it.
Myth #1: LMI is a Waste of Money
One of the most common myths about LMI is that it is a waste of money. Many people believe that they are better off saving up for a larger deposit instead of paying for LMI. While it is true that having a larger deposit can help you avoid LMI, it is not always possible for everyone. In some cases, paying for LMI can actually be a smart financial decision. For example, if you have a stable job and can comfortably make your mortgage payments, paying for LMI can help you get into the property market sooner and start building equity in your home.
Myth #2: LMI Protects You
Another common myth about LMI is that it protects you, the borrower, if you default on your loan. This is not true. LMI is solely for the benefit of the lender. If you default on your loan, the lender can make a claim on the LMI policy to recoup any losses they may incur. However, you will still be responsible for paying back any outstanding debt, and your credit score will be negatively impacted.
Myth #3: LMI Only Applies to First Home Buyers
Many people believe that LMI only applies to first home buyers. However, this is not the case. LMI may be required by lenders for any home loan where the deposit is less than 20% of the property value. This includes investors, second home buyers, and refinancers.
Myth #4: LMI Premiums are Fixed
Some people believe that LMI premiums are fixed and cannot be negotiated. However, this is not true. LMI premiums are calculated based on several factors, including the loan amount, the loan-to-value ratio, and the borrower’s credit score. These factors can vary from lender to lender, which means that LMI premiums can also vary. It is always a good idea to shop around and compare LMI premiums from different lenders to ensure that you are getting the best deal.
Myth #5: LMI is Always Required
Another common myth about LMI is that it is always required if your deposit is less than 20%. While most lenders will require LMI in this situation, there are some exceptions. For example, some lenders may waive the LMI requirement if you have a guarantor who is willing to provide security for your loan. Additionally, some lenders may offer LMI-free home loans if you meet certain criteria, such as having a high credit score or a stable employment history.
Ways to Avoid LMI
While LMI can be a useful tool for getting into the property market, it is always a good idea to avoid it if possible. Here are some ways to avoid LMI:
Save for a Larger Deposit
The most straightforward way to avoid LMI is to save up for a larger deposit. If you can save up 20% of the property value, you will not need to pay for LMI. While this may take longer, it can save you thousands of dollars in the long run.
Get a Guarantor
If you have a family member or friend who is willing to provide security for your loan, you may be able to avoid LMI. A guarantor is someone who agrees to be responsible for your loan if you default on your payments. This can give lenders more confidence in your ability to repay the loan, which may allow you to avoid paying for LMI.
Look for LMI-Free Home Loans
Some lenders offer LMI-free home loans if you meet certain criteria, such as having a high credit score or a stable employment history. While these loans may have higher interest rates, they can be a good option if you are unable to save up for a larger deposit or find a guarantor.
Conclusion
There are many myths about Lenders Mortgage Insurance that can make it difficult for homebuyers to make informed decisions. While LMI can be a useful tool for getting into the property market, it is always a good idea to avoid it if possible. By saving up for a larger deposit, getting a guarantor, or looking for LMI-free home loans, you can avoid paying thousands of dollars in LMI premiums.