When borrowing more than 80% of a property’s value, you will generally have to pay Lenders Mortgage Insurance (LMI).
What is LMI?
LMI in a type of insurance policy that covers the lender (not the borrower) in case of mortgage default. If the borrower can’t meet the loan repayments and the lender is forced to sell the property, LMI covers any shortfall if the sale is not enough to cover the loan.
The biggest advantage to borrowers is that LMI allows the lender to lend larger amounts and have less reliance on a 20% deposit. This means you can potentially have as little as 5% deposit rather than waiting a few more years to save the 20% deposit.
How does LMI benefit me as a borrower?
LMI allows you to purchase your dream home with a smaller deposit and therefore giving you the ability to purchase sooner. For example based on a purchase of $500,000, a 5% deposit means you will need $25,000 savings compared to $100,000 for a 20% deposit. This means some lenders will consider lending 95% of the purchase price of your home with LMI in place
Talk to us today and you may find you are able to buy your new home sooner than you think. We can even help you set up a savings plan to help achieve your goals of owning a home sooner rather than later.
How much does LMI cost?
The cost of LMI can vary depending on the percentage of the property value borrowed and the loan amount. The premium can also vary depending on whether your contribution is made up of genuine savings or has come from other sources, such as a gift.
The cost of LMI can vary from lender to lender, and is calculated on the percentage of the property value you are borrowing. The closer you go to 95% the higher the premium. The premium amount decreases the closer greater deposit you have and the closer you get to 80%.
Therefore calculating LMI is not possible until you have a property price in mind and have selected a lender of your choice.
LMI is a one off fee which is paid at loan settlement. Some lenders will consider capitalising LMI (added to your loan amount). If LMI is added to your loan, your loan balance increases by the premium amount therefore increasing your montly repayments.
Can I avoid paying LMI?
The easiest way to avoid paying LMI is to have 20% deposit for your purchase. If you do not have 20% deposit another alternative is to use a property guarantor. The guarantor can help eliminate LMI by providing a limited guarantee to cover the 20% deposit.
To find out if you’re ready to take the next steps into buying a home, CONTACT us today.