Lenders Mortgage Insurance (LMI) can give you the leverage you need to purchase a home. However, there are several things you should know before jumping in.
What is Lenders Mortgage Insurance?
If you are having trouble putting forward the 20% deposit required for a home loan, some lenders may still allow you to borrow from them, with the added condition of Lenders Mortgage Insurance (LMI).
LMI is designed to protect the lender as they take on what are typically riskier home loans. It ensures the lender can recoup more of the cost of the loan in the event the borrower defaults. If there is not enough money from the sale of the home to cover the loan cost, a shortfall occurs. The lender can then recover the difference from the LMI provider. However, this comes at a cost to the borrower in the form of an insurance premium.
For this reason, it’s often known as an LMI Loan, as it is effectively an additional loan on top of your home loan with different conditions.
Why Would You Get LMI?
While LMI is designed to protect the lender, there are a number of benefits for the borrower as well. Firstly, it allows borrowers to access home loans and purchase a home even without the required deposit. This can accelerate the process of home buying if you’re on a deadline, or even allow you to purchase beyond your current means if you find a home that’s slightly out of your budget.
Will You Need LMI?
If you’re purchasing a home and don’t have the deposit on hand, typically 20% of the property value, you will have a high Loan to Value Ratio (LVR). This is simply the percentage of the value of the property that is covered by the home loan, compared to your initial deposit. With a deposit of 20%, you will have an LVR of 80%. Any more than that and your lender may require you to pay for LMI. This of course will differ from lender to lender. Your lender will inform you of whether you will need to pay LMI, and the cost of the LMI Loan itself.
One exception to the rule is the First Home Loan Deposit Scheme (FHLDS). If you’re eligible for the FHLDS you can avoid paying LMI, provided you can put forward between 5% and 20% of the home loan as a deposit.
How Much Does LMI Cost?
Depending on a range of factors, such as the value of the property and the size of your deposit, you may end up paying between $10,000 and $30,000 on top of your loan in LMI fees. These numbers are not definitive and will change from lender to lender.
Structure Your Home Loan Correctly From the Start
Whether you’re purchasing your first home or another investment home, structuring your home loan correctly is essential. Borg Financial’s team of experienced financial experts can help you set up your home loan correctly from the beginning, so you’re not hit with unexpected fees down the track. We compare loans from more than 40 lenders and look at your unique financial situation and goals to connect you with the loan that’s right for you. Learn more about our services today on our website, or contact us to request a consultation.