While some view LMI as being exclusively beneficial for lenders, we explore the value of LMI for first home buyers.
Do not confuse LMI just a cost to be paid. It actually assists you in being able to buy a property sooner than you normally could have.
Not to be confused with mortgage protection insurance (which is designed to protect the borrower), LMI is insurance that covers the lender’s risk within a residential mortgage transaction should the loan go into arrears and the borrower is unable to resolve the situation satisfactorily. LMI is a fairly common practice within the industry, particularly for new home buyers who may struggle to save a deposit. It allows an additional fee to be paid by the borrower and usually applies when the loan is more than 80 percent of the purchase property’s price.
The purpose of LMI is to ensure security for the lender in case the borrower fails to make loan repayments. Even though the actual house acts as security, the nature of the property market, like any investment class, means there is a chance that its value could decline, resulting in a financial loss for the lender.
The cost of the premium is dependent on several factors, such as the loan size and property value, and most insurers are flexible when it comes to the method of payment. It can either be a one-off upfront premium payment or that premium could be included in the overall cost of the loan and included in monthly repayments. It is not transferable, which means a new loan may require a new fee depending on how much equity the borrower has.
What’s in it for me?
While it may appear that it is exclusively favourable to the lender, there is value to borrowers in paying the premium. Opting for LMI means it allows a borrower to independently purchase a property sooner than they otherwise might. LMI is the alternative to using a guarantor or having to save for a bigger deposit, both of which are not feasible options for many first home buyers.
A deposit of at least 20 percent of the desired loan amount is required for a borrower not to be deemed ‘high-risk’. If you consider that the average price of a home in Sydney is $650,000, that would mean a deposit of around $130,000 is required. The beauty of LMI is that it buys time, which means borrowers with smaller deposits are able to enter the market sooner rather than later.
The major benefit of LMI is that it allows the dream of homeownership to become a reality for a lot of first home buyers. To see if this is the case for you, speak to one of our team members.
Not all borrowers are the same. People have different priorities at different sets of time. Therefore, we would not ask all our clients to make a payment of LMI. There are ways through which one can attempt and Avoid the LMI payment.
Lender’s Mortgage insurance is required when the value of loan is more than 80% of a property’s purchase price or the property valuation if refinancing. Simply explaining, a lender considers a loan to carry a higher risk if the loan-to-value-ratio (LVR) is above 80% and the LMI is payable. Here’s how you can avoid paying the costly premium.
Save for a higher deposit
The purpose of LMI is to protect the lenders from chances of borrower’s making loan defaults i.e. failing to make loan repayments. When the loan amount is more than 80 per cent of the value of the property being mortgaged, the risk to the lender of not recouping their costs, should the borrower default, is increased. A higher deposit means a smaller loan amount and therefore a lower LVR thereby reducing the lender’s risk. A loan of 80% or less of the property’s value is the key to avoiding paying LMI.
Get a guarantor
Often all homebuyers do not have the financial ability to meet a 20 per cent deposit but still want to avoid LMI, you do have the option of getting a guarantor for your loan. A close relative such as a parent, sibling or perhaps a grandparent, may be eligible to act as a guarantor by using their equity in the property to help you secure yours and keep your total loan below 80%. In some instances, having a guarantor on your loan may mean that you won’t need a deposit at all.
A little insider knowledge from our financial advisor may go a long way in helping you to find a loan that won’t require you to fork out for LMI.