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Lender’s mortgage insurance is a common cost for many home buyers, on top of their home loan deposit. We’ll take you through the ins and outs of how it works.
LMI is typically added on to some home loans in order to help protect the lender from any losses if the borrower has to default on their home loan repayments.
It also means that some lenders can approve larger loan amounts and more home loan applications if they’re protected by LMI.
If your home loan deposit is less than 20% of the value of your property, or if your loan to value ratio is higher than 80%, then you may need to pay for LMI.
Many lenders add this cost into your home loan, which means you could also be charged interest on this along with your standard home loan repayments.
Generally speaking, the more money you borrow from a lender, the higher the risk would be of you defaulting on your repayments. If this happens, there could be a potential financial loss to the lender.
If you provide a relatively small deposit ( anything less than 20%) then it’s likely you need to take out LMI . Again, this comes down to how much risk the lender would be taking with a new customer.
This isn’t the case with all lenders, but some may charge a higher LMI premium for people who are buying an investment property rather than one they’re going to live in themselves. For some lenders, owner-occupiers are a lower risk than an investor, so ask your lender what their policy is.
Some lenders perceive full-time employees as lower-risk and favour them for approval on new home loans.
As there are many lenders on the market providing home loans, there are also many LMI insurance providers, so your LMI premium could also be affected by what your lender’s chosen insurer charges them.
Home loan applicants in certain professions may not need to pay LMI so long as their LVR isn’t above 90%. These professions may include medical professionals, accountants, lawyers and more. Check with your lender if this applies to your profession.
No, LMI is purely to reduce the risk of loss for the lender. If you’re looking for personal protection, there are separate policies such as mortgage protection insurance that may assist.
There are a few things you can do to help reduce the risk of paying too much LMI on top of your home loan.
If you can provide a deposit of more than 20% for the property you’d like to purchase, then you generally won’t need to pay LMI. You’ll need to budget well and weigh up the pros and cons of waiting a longer period of time to buy your home.
By providing a deposit of 20% of the total property value or more, you could make significant savings in repayments over the lifetime of your home loan.
Asking someone to be your home loan guarantor is a big responsibility, because they would be the person who would need to pay off your loan in the event where you’re no longer able to do so.
Lenders are happy to do this because it removes a lot of risk for them, but there can be a lot of pressure on the guarantor.
Eligible first home buyers can supply a deposit of 5% under the FHLDS. Learn more about the FHLDS here.
If you’re eligible and successful, then under this scheme, the Federal Government helps provide cover for the additional deposit amount needed to reach the 20% threshold.
You can ask your prospective lender to give you an estimate of the LMI premium when you inquire about a home loan, as this could differ between lenders.
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Last updated: 15/03/2022