For many aspiring homeowners, one of the biggest challenges is coming up with the required deposit to secure a home loan. In Australia, most lenders require a minimum deposit of at least 20% of the property’s purchase price. However, this amount can be daunting, especially for first-time homebuyers. Fortunately, lenders mortgage insurance (LMI) offers a solution to this problem.
What is Lenders Mortgage Insurance?
LMI is an insurance policy that protects the lender in case a borrower defaults on their home loan. It is a one-time premium payment that is added to the total loan amount and is paid by the borrower. The policy is put in place by the lender and is required when the borrower’s deposit is less than 20% of the property’s purchase price.
The purpose of LMI is to mitigate the lender’s risk in case the borrower is unable to repay the loan. In the event that the borrower defaults on the loan, the lender can make a claim on the LMI policy to recover any losses incurred. This insurance policy does not protect the borrower in any way.
How Does Lenders Mortgage Insurance Work?
LMI is calculated based on the loan amount and the size of the deposit. The smaller the deposit, the higher the LMI premium will be. The premium can range from a few thousand dollars to tens of thousands of dollars, depending on the loan amount and deposit size.
The LMI premium can be paid upfront or added to the loan amount. If it is added to the loan amount, it will accrue interest over the life of the loan, which can significantly increase the overall cost of the mortgage.
It is important to note that LMI is not transferable between lenders. If a borrower wishes to refinance with a different lender, they will need to pay a new LMI premium.
Who Needs Lenders Mortgage Insurance?
As mentioned earlier, LMI is required by most lenders when the borrower’s deposit is less than 20% of the property’s purchase price. This means that borrowers who are unable to come up with a 20% deposit will need to pay for LMI.
However, some lenders may offer an alternative to LMI. For example, some lenders may allow a family member to act as a guarantor for the loan, in which case LMI may not be required.
Pros and Cons of Lenders Mortgage Insurance
Like any financial product, LMI has its pros and cons. Here are some of the advantages and disadvantages of LMI:
Pros:
- Allows borrowers to purchase a property with a smaller deposit
- May enable borrowers to enter the property market sooner
- Can be tax-deductible for investment properties
Cons:
- Can significantly increase the overall cost of the mortgage
- Does not protect the borrower in any way
- May be required even if the borrower has a good credit history and income
Conclusion
Lenders mortgage insurance is a product that enables borrowers to purchase a property with a smaller deposit. However, it is important to weigh the pros and cons carefully before deciding whether to pay for LMI. Borrowers should also shop around for the best LMI premium and consider alternatives, such as a guarantor loan.
Ultimately, LMI can be a useful tool for those who are unable to come up with a 20% deposit. However, borrowers should be aware of the costs involved and carefully consider whether it is the right option for them.