Mortgage insurance can certainly help fast-track your dream of home ownership, but you need to be clear about how it works.
Perhaps the most important point to understand is that Lenders Mortgage Insurance (LMI) is in place to protect your lender if you default on your mortgage repayments – not you. In the unfortunate event that your home is repossessed and sold, LMI covers the gap between what the property is sold for and what is still owing to your lender.
Don’t mistake LMI for Mortgage Protection Insurance, which covers your mortgage repayments in the event of death, sickness, unemployment or disability.
LMI is a government regulation and it’s compulsory for both banks and non-bank lenders to charge this fee if they are lending you 80% or more of the purchase price of your property. Many people applying for lo-doc home loans also rely on LMI to secure finance.
Because the LMI amount is added to the total of your loan and paid off as part of your monthly mortgage repayments, it’s an effective way of securing a home loan when you only have a small deposit. However, even though your loan is protected by LMI and you can borrow on a lower deposit, you will still have to meet all the statutory credit checks to ensure you can meet your mortgage repayments.
The amount of LMI you will have to pay will vary depending on how much you are borrowing, but the following is an example estimated using an online calculator:
Property purchase price: $ 500,000
Deposit: $ 40,000
Loan amount: $ 460,000
First Home Buyer: No
LMI fee: $ 11,224
Additional monthly loan repayment: $94
Generally, your lender organises LMI and the majority of lender mortgage insurers will provide LMI for just about any residential mortgage loan.
Tips for saving money on, or avoiding LMI:
- If you are borrowing more than $300,000, LMI begins to increase significantly.
- Make sure you are aware of exactly how much you will be paying, as some people find it more prohibitive to pay LMI than to simply save the extra deposit.
- LMI increases forevery 2% rise inyour loan to value ratio (LVR). Sometimes finding a few hundred extra dollars could make all the difference; for example, if you’re borrowing 90.1% of the value of your property but you could decrease that to 89.9%, you would reduce the LMI payable on your loan. It’s possible that saving an extra $500 to reduce your LVR can save $1000 or more in LMI.
- Borrow less. Saving a larger deposit to keep your LVR below 80% will definitely save you money on LMI, or may prevent you having to pay it all.
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