Article by Davina Deluao
A big part of entering the property market is preparing your finances and understanding the different types of fees you will be expected to cover, so nothing comes as a surprise. When it comes to acquiring the home you desire, it’s common knowledge you need to put down a deposit during the initial stages of settlement, and depending on how much of the property’s value you are borrowing, you may also need to pay Lenders Mortgage Insurance (LMI).
In this article, we answer the most common questions most people have about LMI. Read on.
What Is It?
The purpose of Lenders Mortgage Insurance is to ensure that lenders are protected from financial loss in case the borrower is unable to meet the agreed loan repayments. It is a one-off payment that’s required at the time of the loan settlement and usually handled by the lender themselves. It is important to note that mortgage protection insurance is a separate product and aims to assist the borrower when their ability to pay back is affected due to unforeseen circumstances.
When Do You Need To Pay For It?
To be prepared for the risk of the borrower defaulting on their loan, lenders charge LMI fees when your home loan deposit is less than 20% of the total property value. In other words, borrowing over 80% of the property’s value would mean having to pay LMI as part of the agreement. As a result, financial institutions are able to offer higher loan amounts at less risk to themselves. It does mean that you end up borrowing more money, but when saving a 20% deposit takes the average couple over 6 years to save for a house, paying LMI means you can secure your property faster. It also means that you don’t need to worry about involving a guarantor to help you secure a loan.
How Does it Work?
The payment itself can either be paid upfront or added to the total home loan. If it is added to the total home loan, it’s important to note, it effectively increases the amount you need to borrow and consequently the amount of interest you pay over the life of the loan. Depending on your loan to value ratio and the size of your deposit, the approximate cost of Lenders Mortgage Insurance may vary between different lenders and the specific policies adhered to.
How Can It Be Avoided?
For those who may opt to avoid paying LMI, they may choose to save up the 20% deposit beforehand. Although this may mean waiting longer, it does mean avoiding LMI. On the other hand, there may be some who are eager to take advantage of a great price or deal and are able to find a guarantor who is willing to help secure the loan. Alternatively, there may be government grants and stamp duty concessions that you are eligible for which can help provide the additional funds you need to reach your goal.
What’s My Next Step?
There are different paths homeowners can take when it comes to Lenders Mortgage Insurance and assessing the best way to reach their desired financial outcome. As there isn’t one specific solution that works for all, seeking professional and independent advice on the best way to achieve your property ownership dream is definitely beneficial. By making the most of your resources, you can clearly research and evaluate the type of home loan that suits your requirements.