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On the plus side, that means stumping up for LMI could help you fast-track your dreams of home ownership by reducing the amount you need to pull together for a deposit. But there are some important things you need to understand about it first.
From what LMI is to how to avoid it, here’s the lowdown.
First and foremost, don’t mistake LMI for Mortgage Protection Insurance, which covers your mortgage repayments in the event of your death, disability, sickness or unemployment.
LMI is there to protect your lender – not you – in case you default on your home loan repayments.
The cost of LMI may need to be paid upfront in addition to your deposit, or it might be added to the total of your home loan and could be paid off as part of your monthly mortgage repayments.
LMI is generally applicable to loan-to-value ratios (LVRs) above 80 per cent. The LVR is the percentage of money you need to borrow compared to the purchase price of the property.
Lenders usually charge LMI if your deposit if your LVR is above 80 per cent. However, some lenders may allow LVRs up to 90 per cent depending on your profession, the industry you work in, and an array of credit assessment variables.
The amount of LMI you have to pay will vary depending on how much you’re borrowing. The lower your deposit is, the higher your LMI will be. You can use an online calculator to get an indication of how much LMI you may need to pay.
Keep in mind that borrowing to cover other costs, such as stamp duty, may push your LVR higher. That means your LMI might go up, too.
The best way to avoid LMI is to save a deposit that’s at least 25 per cent of the purchase price of the property you want to buy. That way, you may have enough to cover stamp duty and other costs.
You may also be able to get around it if someone – typically one or both of your parents – is willing to act as a guarantor for you. This means they provide your lender with a limited guarantee using their own property as security for the new mortgage.
Your guarantor is then liable for an agreed, guaranteed amount of your loan in the event of a default. However, they will need to have sufficient equity in their home so they don’t incur LMI when supporting the guarantee.
If neither of these options is realistic for you, remember that a little extra can go a long way. LMI increases with your LVR, and sometimes you only need to add a few hundred dollars to your deposit to keep your LMI from jumping into a higher category. That’s why it’s important to be aware of your LVR status.