Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance or LMI has helped over 2 million Australians get into their dream home. It enables you to buy or build a home if you have less than the 20% deposit required by most lenders.
With house prices constantly rising, it is becoming increasing difficult to save a deposit. By insuring your home loan with Lenders Mortgage Insurance, many lenders will only require a deposit as little as 5%, giving you the opportunity to buy or build a home sooner.
You will be required to pay the cost of Lenders Mortgage Insurance. The premium is calculated on the amount of your loan and the amount of the deposit you are contributing. Whilst the premium may appear costly at first, you need to consider the benefits.
Some of the benefits of getting into your own home sooner are:
- stop wasting money paying rent
- enjoy the stability and comfort of owning your own home
- protect yourself against the rising cost of established properties
- protect yourself against the rising cost of land and the cost to build
- build yourself an asset for the future
The good news is that many lenders will now capitalise LMI premiums. This means that you don't have to find the cash to pay the premium upfront. The cost of the insurance is simply added to the amount that you borrow and included in your monthly repayments.
LMI protects the lender against loss if you default on your home loan. If the unfortunate situation arises where you can no longer afford to repay your home loan, the lender will take legal action and sell the property to repay its debt.
When you only contributed a small deposit towards the purchase of the property, there is a very real possibility that the home may sell for less than the amount outstanding on your loan. This is especially true when you factor in the associated legal and selling costs.
Lenders Mortgage Insurance protects the lender against any loss that may be incurred if there is a shortfall between the sale price of the property and the loan outstanding.
Lenders generally consider that a 20% deposit gives them a sufficient buffer to protect them against loss. This is why when you apply for a loan with less than a 20% deposit, they will require the loan to be covered by Lenders Mortgage Insurance.
Remember that Lenders Mortgage Insurance protects the lender and not you.
If you can qualify for a Keystart Home Loan you will not be required to pay Lenders Mortgage Insurance which can save you thousands of dollars.
Some lenders do not require Lenders Mortgage Insurance and charge a "Risk Fee" instead. The amount of the Risk Fee depends on the amount of the loan and the deposit that you have towards the purchase price.
You can avoid Lenders Mortgage Insurance all together by having a family member go guarantor on your behalf. They simply provide a guarantee to the lender for 20% of the purchase price. The Guarantee needs to be secured by either a first or second mortgage over another property.
Another way to avoid or reduce Lenders Mortgage Insurance, is to borrow the required 20% deposit.
You may be able to borrow from family or friends, or take out a personal loan or credit card.
This method works particularly well when you are on a high income but have not yet been able to save a 20% deposit. A higher income will allow you to pay off the other debts sooner to avoid paying too much in extra interest payments.
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Lenders Mortgage Insurance helps you to own your own home sooner
