Lender’s Mortgage Insurance
What is Lender’s Mortgage Insurance and should I use it?
For the uninformed, Lender’s Mortgage Insurance is often painted as something to steer clear of if you want to avoid hefty additional fees. However, Lender’s Mortgage Insurance can be an invaluable option for buyers wanting to get into the property market and have smaller deposits. When used with an understanding of its purpose, Lender’s Mortgage Insurance can make all the difference in an approved mortgage and a confirmed move-in date, or a decline on an application.
Lender’s Mortgage Insurance is a tool used by lenders for borrowers whose home loan deposit is less than 20%. It’s designed to protect your lender in the event you’re unable to meet your loan repayment commitments and default on your loan. Some borrowers can get confused by LMI, believing it to be an insurance that protects them in the event that the property must be sold to satisfy the outstanding loan. In fact, LMI only protects the lender, guaranteeing coverage of the loan in the case of a shortfall on the sale value against the loan value.
Why would I want to pay for LMI?
The idea of paying for insurance to protect someone else isn’t attractive to some. However, LMI allows for buyers who otherwise would require further time to save a deposit to access the property market at a lower loan-to-value ratio (LVR). If the LVR is below 80%, the application of LMI to your mortgage may allow a lender to give you the green light where you would otherwise be viewed as too risky a loan applicant.
If your desire is to get into the property market as soon as possible, LMI may be a solution that suits your individual financial situation and property goals. The time you gain through buying now, rather than waiting to bump up your savings over months or years, may make the cost of LMI worth it.
How much does LMI cost?
LMI is calculated on the basis of each particular loan’s details. With some borrowers putting as little as 5% down, LMI is then calculated based on the overall LVR and the size of the loan in question. The cost may also vary from lender to lender based on their insurance provider.
LMI may be able to be added onto your overall home loan and financed within your mortgage, meaning you’re not out of pocket for this cost upfront.
How do I know if LMI is for me?
There’s no one right answer. For some, the benefit of getting into a first home sooner rather than later makes the cost of LMI worth it. For others, they’d prefer to continue to save until they’re able to bring a bigger deposit to the table and remove the additional cost LMI would add. No two buyers are the same, nor do they bring the same financial and property goals to the table, so this is a decision that must be made on an individual basis.