What is Lenders Mortgage Insurance?
How is Lenders Mortgage Insurance calculated?
How can I avoid Lenders Mortgage Insurance?
Will I have to pay Lenders Mortgage Insurance?
*Warning!* Finance talk ahead!
Lenders Mortgage Insurance or LMI as it is often referred, is a potential additional cost you may have to pay depending on how much of a deposit you have saved for a home loan. Basically, it’s an insurance policy you pay for to protect the lender from loss should you not meet your home loan repayments.
How much is LMI?
Well that depends on your loan amount and the deposit you have saved. LMI is calculated to make up the difference of the required 20% deposit. So if you only have a 5% deposit saved, your LMI is going to be the 15% missing from your 20% deposit. So will you need to pay it? Generally, if your LVR (loan-to-value ratio) is more than 80%, you will need to pay LMI. LVR is the amount of your loan compared to the value of the property. Which means for that to be 80%, you will need a 20% deposit to avoid paying LMI. There are a couple of other contributing factors which may determine your need to pay LMI, which include whether your property is for investment purposes, your employment circumstances and the insurer.
However there are a few ways around having to pay LMI should you not have a 20% deposit.
1. Get a guarantor
Guarantors are people (most often family members), who sign on to accept the responsibility of loan payments should you ever default on a payment. It is a financial risk to the guarantor, which is usually why
people ask Mum and Dad! This option should be carefully considered by all parties involved and we recommend seeking professional advice should you be considering this option.
2. First Home Loan Deposit Scheme (FHLDS)
This one is only for the first home buyers, however from the beginning of 2020, the Australian Government introduced the new scheme which meant they would guarantee the additional amount needed to reach a 20% deposit to 10,000 applicants each year. It is important to note, that figures indicate that in 2018 there were 110,000 first home buyers, so this offer is only for a very small fraction of the market.
3. Leverage Your Occupation
Some occupations are viewed as a lesser risk of redundancy and job loss, so it could be worth mentioning your occupation to your lender during the application process. According to Mortgage Choice, LMI may be waived for LVR’s up to 90% for some professions, which means you may only need to save a 10% deposit.
Before making any financial decisions, we suggest seeking professional financial advice, whether it be your local bank, home loan lender or mortgage broker.