Lenders Mortgage Insurance is required whenever your deposit is less than 20% of your home’s value. This insurance protects your lender in case you fail to pay the mortgage. While it’s unfortunate to have to pay mortgage insurance, it isn’t all bad. The main upside is that you can buy a home without plunking down 20% of your hard earned cash (which may take you a few more years’ worth of saving).
While no one likes to pay for an insurance that protects the bank, LMI doesn’t necessarily have to be viewed as a bad thing. In fact, we believe it can be a handy tool for leveraging in the world of property investing. LMI has some good qualities and gives you the option of purchasing property sooner or using LMI to buy a better home that you wouldn’t have been able to afford – for a cost of course.
Saving a 20% deposit for a house is no easy feat. It can take many years and if property prices are on the increase – you may find that once you’ve saved that 20% deposit, the price of the property you’ve been saving for has increased, meaning you need to keep saving. Depending on your lender’s requirements, LMI allows you to borrow up to 95% of the purchase price of your home, with a lower deposit than what is usually required.
Let’s look at an example – if you’re buying a $500,000 home for example and have just $50,000 deposit, you may need to pay a LMI premium of around $8,800.
So the simple question for buyers is this: Wait to buy until you’ve saved that extra $50,000 (in the above example) or cop the bill for $8,800? The premium is a once-off for the life of that loan, and of course once your equity tops 20% (through either debt reduction or capital gain) you can shop for another loan without LMI.
When will I need to pay LMI?
There are some exceptions but generally you will need to pay LMI when your deposit is less than 20% of the purchase price of the property you are buying. The insurance premium is either paid up front as a lump sum premium, or added to the total value of the mortgage, and repaid with your monthly repayments.
Is it better to pay the LMI premium, or to wait until I have a larger deposit?
This is a question that depends on what you want to do, and what your situation is right now. There isn’t a blanket answer for everyone. To work out what your options are, and to get the information you need to make a well-informed choice, it is best to speak to a Mortgage Broker. Your Broker will explore your options with you and give you a clear picture of the paths you can choose moving forwards.
Who is insured?
It is actually your lender, not you or your guarantor that is covered by LMI. It’s for the lender to protect them if they’re taking an increased risk on a loan by lending you more than 80% of your purchase value.
What costs are involved?
Unlike traditional insurance products, LMI is a once only premium, payable at loan settlement, which provides the lender with cover for the full term of the loan.
Your lender will calculate the premium by taking into consideration the size of your deposit and the type of loan product you choose. To reduce upfront costs, it may be possible to add the LMI premium onto the total loan amount.
How do I avoid paying LMI?
There are some exceptions but generally two ways to avoid paying LMI. Either save a 20% or more deposit or have someone go guarantor for your loan.
The Opportunity
For first home buyers, LMI reduces the amount of upfront capital you need to own your home, which means that you only need a 10 percent deposit. For property investors, LMI lets you borrow more which lets you maximise the benefits of negative gearing. Most importantly, LMI gives you greater leverage to save your cash and use it to fund future investments.
The misconception surrounding LMI is that it must be paid as a lump sum, upfront. This is not the case. When structured properly, LMI can be rolled into the loan amount, adding a small monthly premium to your repayments. Yes, it’s an additional cost, but the question you should be asking yourself is whether it’s a small price to pay for keeping your options open?
In our opinion, LMI premiums are a case of minimal pain for long term gain. Handing over less of your hard earned cash frees up your future equity, giving you more ways to use your money to make money. Depending on your situation and what you want to achieve – always seek professional advice from a good Mortgage Broker!
For an honest and unbiased opinion, talk to Wholistic Finance today on 0427 918 232 or email daks@wholisticfinance.com.au
Disclaimer: The Information is general in nature and does not consider your particular investment objectives or financial situation. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made because of the information provided without first seeking expert financial advice. Your full financial needs and requirements would need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.
