When it comes to buying a home, many people need to take out a mortgage to finance their purchase. However, if you don’t have a large enough deposit, you may be required to take out lenders mortgage insurance (LMI). While LMI can help you get approved for a home loan, it also has some significant drawbacks that you should be aware of before signing up.
What is Lenders Mortgage Insurance?
Lenders mortgage insurance is a type of insurance that protects the lender against the risk of a borrower defaulting on their home loan. If you’re unable to make your mortgage repayments, the lender can claim on the insurance policy to recover any losses.
Typically, lenders will require you to take out LMI if you have a deposit of less than 20% of the purchase price of the property. The cost of LMI can vary depending on several factors, including the size of your deposit, the amount you’re borrowing, and the lender’s requirements.
The Cost of LMI
The cost of LMI can be a significant expense, often adding thousands of dollars to the cost of your home loan. This is because the premium for LMI is generally calculated as a percentage of the loan amount, and the percentage can vary depending on the size of your deposit and the lender’s requirements.
For example, if you’re borrowing $500,000 and have a deposit of 10%, you may be required to pay LMI of around $12,500. This can be a significant expense, especially if you’re already struggling to save for a deposit.
The Impact on Your Loan
While LMI can help you get approved for a home loan, it can also have a significant impact on your loan. Because LMI is calculated as a percentage of the loan amount, the larger your loan, the higher your LMI premium will be.
This means that if you’re required to take out LMI, you may end up with a higher interest rate or larger monthly repayments to cover the cost of the insurance. This can make it more difficult to meet your mortgage repayments and could put you at risk of defaulting on your loan.
The Limited Coverage of LMI
Another issue with LMI is that it only covers the lender, not the borrower. This means that if you’re unable to make your mortgage repayments, you could still lose your home and be left with a significant debt to repay.
While LMI may provide some protection for lenders, it doesn’t provide any protection for borrowers. This means that if you’re struggling to make your repayments, you may need to consider other options, such as refinancing or selling your home.
The Difficulty of Cancelling LMI
If you’re required to take out LMI, it can be difficult to cancel the insurance. This is because LMI is typically a one-off payment that’s added to your home loan at the start of the loan term.
If you want to cancel your LMI, you’ll need to pay off enough of your loan to bring your deposit above the 20% threshold. This can be difficult to do, especially if you’re already struggling to make your repayments.
The Alternatives to LMI
If you’re concerned about the cost or limitations of LMI, there are several alternatives that you can consider. These include:
- Save a larger deposit: If you can save a larger deposit, you may be able to avoid the need for LMI altogether.
- Get a guarantor: If you have a family member or friend who’s willing to act as a guarantor for your loan, you may be able to avoid LMI.
- Buy a cheaper property: If you can’t afford a property with a large enough deposit, consider buying a cheaper property that doesn’t require LMI.
Conclusion
Lenders mortgage insurance can be a useful tool to help you get approved for a home loan, but it also has some significant drawbacks. The cost of LMI can be a significant expense, and it can also have a significant impact on your loan and your ability to repay it.
If you’re considering taking out LMI, it’s essential to understand the limitations of the insurance and consider the alternatives before making a decision. By doing so, you can make a more informed choice about the best way to finance your home purchase.