Lenders Mortgage Insurance (LMI) is required when the value of a loan is more than 80% of the purchase price of a property, or the property’s valuation if it is a refinance. In very basic terms, a lender considers a loan to be more risky if the loan-to-value ratio (LVR) is greater than 80%, in which case LMI is paid.
Not to be confused with Mortgage Protection Insurance, which is designed to protect the borrower, LMI covers the lender’s risk within a residential mortgage transaction in the event the borrower defaults on the loan. LMI is a fairly common practice within the industry, particularly for first-time homebuyers who may find it difficult to save a 20% deposit.
Reading: What is pmi insurance for
Although the real property acts as collateral for the mortgage, the nature of the real estate market, like any kind of investment, means that there is a chance that its value will decline. this could result in a financial loss to the lender if the borrower is unable to repay the loan and the property is sold for less than the value of the loan.
The cost of the lmi premium depends on several factors, such as the amount of the loan and the value of the property. Most insurers are flexible when it comes to the LMI payment method, it can be a single premium payment up front or a premium could be included in the total cost of the loan and included in the regular payments.
is non-transferable, which means that a new loan, for example if the borrower refinances the loan, may require a new lmi premium depending on the amount of equity the borrower has in the property.
what’s in it for me?
while lmi protects the lender’s interests, there is value for borrowers in paying the lmi premium.
Opting for LMI means that it allows a borrower to purchase property independently sooner than they might otherwise. LMI is the alternative to using a guarantor or having to save for a larger deposit, which are not viable options for many first-time homebuyers.
A deposit of at least 20% of the desired loan amount is required for a borrower not to be considered “high risk”. saving this amount is difficult for many buyers, lmi allows those borrowers with smaller deposits to enter the market sooner rather than later.
See also: How To Submit An Insurance Claim
the main advantage of lmi is that it can enable the dream of home ownership to become a reality for many first-time homebuyers.
how can i avoid paying lmi?
Depending on your circumstances, you may be able to save for a higher deposit; A higher deposit means a smaller loan amount and thus a lower LVR, reducing the lender’s risk. a loan of 80% or less of the value of the property is the key to avoid paying lmi.
If you don’t have the financial capacity to put up a 20% deposit, but still want to avoid the LMI, you have the option of getting a guarantor on your loan. A close relative, such as a parent, sibling, or perhaps a grandparent, may be eligible to act as guarantor, and they use the equity in your home to help you secure yours and keep your total loan below 80%. however, it is important to remember that acting as a guarantor also carries some risks.
the main advantage of lmi is that it allows the dream of owning a home to become a reality for many first-time home buyers. To see if this is the case for you, talk to an MFAA-accredited financial broker.