You may have chanced upon the term Lenders Mortgage Insurance or LMI while you were doing some research on home loans. If it sounds familiar yet you don’t know what it means, we have provided the meaning for you below.
What is LMI?
This is an insurance that lenders take out so they can lend to borrowers who can only pay a smaller amount for their home deposit. This is usually when the amount borrowed is above 80 percent of the property value. As smaller deposits present higher risk for lenders, LMI gives Australians the ability to borrow a bigger amount without placing too much risk on the lenders.
What can you expect from an LMI?
An LMI is a one-off insurance premium that protects lenders in case you won’t be able to pay your mortgage. Although your property provides security for your loan, its sale price might not be enough to cover default costs and interests. This is especially true during stagnation of property prices and your property sells for less than its original value or purchase price.
When is an LMI paid off?
Lenders will only take out this type of insurance if you are borrowing more than 80 percent of the value of the home you are buying. As the borrower, the premium for this is usually passed on to you and will be added to your loan amount.
Keep in mind that the higher loan percentage compared to the property value, the bigger the amount you will have to pay for the LMI.
How much do you have to pay for an LMI?
The LMI premium you need to pay will depend on your lender, your deposit amount and how much you borrowed. However, this will most likely amount to several thousands of dollars.
Based on the Genworth LMI estimator, you will need to pay $7,056 (excluding stamp duty) if you bought a $400,000 worth of property and borrowed 90 percent of the property’s value, which is $360,000.
You can tally your own numbers on this Genworth calculator here.
What happens if you will go for refinancing?
As an LMI is not portable and is lender specific, you will most likely have to pay LMI again if you go for refinancing and you will still be borrowing more than 80 percent of the value of your home. More often than not, this could outweigh the refinancing benefits you were expecting to get from a lower home loan rate.
Before you decide on refinancing, talk with your lender about LMI costs. This way, you will be able to calculate whether this move is worth it or not.
How can you avoid paying LMI?
You can avoid paying LMI through the suggestions below:
– Do not get a home unless you have enough saved to pay a deposit of 20 percent or more of the purchase price. The amount you need to save should already include such extra costs as solicitors’ fees and stamp duty, among others.
– Before you resort to borrowing a bigger amount, get help from using a guarantor or a gift.
– A guarantor can be your parents or a close friend who will offer up an owned property as additional loan security. This will result in your loan being secured not just by the property you are buying but also by your guarantor’s property. This will provide the lender sufficient equity to let you borrow more than 80 percent of your home’s value, even if you are not the owner of the other property.
There are downsides to using a guarantor though and these include your guarantor not being able to sell the property or make use of the equity themselves when they need it. Another downside is if you are unable to pay your loan, their property might be sold off to pay for the shortfall. Guarantors should seek financial and legal advice make sure they understand the risks of the move they are about to make.
– Using a money gift from your parents is a good way to add to your deposit and avoid paying LMI. Lenders will always look into your savings history and will take this into account if you borrow more than 80 percent of a property’s value. However, it is a good move to ask help from your parents if your money for the deposit is close to the 20 percent needed.
These are just among the most important points you should know about Lenders Mortgage Insurance or LMI. If you have more questions, then it is best if you will approach your lender.