Buying a house is one of the biggest financial commitments that a person can make in their lifetime. However, it’s not always easy to come up with the large sum of money required for a deposit. In Australia, if someone wants to buy a house with less than a 20% deposit, they will likely need to pay Lenders Mortgage Insurance (LMI). In this article, we will be discussing what Lenders Mortgage Insurance is, how it works, and how to avoid it.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is an insurance policy that lenders take out to protect themselves in case the borrower defaults on their loan. In Australia, if a borrower has less than a 20% deposit, the lender will usually require them to pay LMI. The cost of LMI is usually added to the loan amount, which means that the borrower will have to pay interest on it for the life of the loan.
LMI is different from other types of insurance because it doesn’t protect the borrower. Instead, it protects the lender. If the borrower defaults on their loan and the lender has to sell the property to recover their money, LMI will cover any shortfall between the sale price and the outstanding loan amount.
How Does Lenders Mortgage Insurance Work?
Lenders Mortgage Insurance works by shifting the risk of a borrower defaulting from the lender to the insurer. The insurer will pay the lender if the borrower defaults on their loan. The cost of LMI is usually calculated as a percentage of the loan amount and can be quite expensive, especially for borrowers with a small deposit.
The cost of LMI can vary depending on a number of factors, such as the size of the deposit, the loan amount, and the borrower’s credit history. It’s important to note that LMI is a one-off payment, but the cost can be substantial. For example, if a borrower has a 10% deposit on a $500,000 property, they could be looking at paying around $17,000 in LMI.
How to Avoid Lenders Mortgage Insurance?
The best way to avoid Lenders Mortgage Insurance is to save up a large deposit. If a borrower has a 20% deposit, they won’t have to pay LMI. This means that they can save thousands of dollars in insurance premiums and interest over the life of the loan.
However, saving up a large deposit is not always easy, especially for first-time buyers. In some cases, it may be possible to get a guarantor loan. A guarantor is someone who agrees to guarantee the loan, which means that they will be responsible for the repayments if the borrower defaults. This can help the borrower to avoid LMI, but it’s important to remember that the guarantor will be taking on a significant financial risk.
Another way to avoid LMI is to consider a different type of loan, such as a low deposit or no deposit loan. However, these types of loans usually come with higher interest rates and fees, which can end up costing the borrower more in the long run.
Conclusion
Lenders Mortgage Insurance is an insurance policy that lenders take out to protect themselves in case the borrower defaults on their loan. It’s usually required if the borrower has less than a 20% deposit. The cost of LMI can be substantial and is usually added to the loan amount, which means that the borrower will have to pay interest on it for the life of the loan. The best way to avoid LMI is to save up a large deposit, but this is not always possible. Other options include getting a guarantor loan or considering a different type of loan, such as a low deposit or no deposit loan.