Lenders Mortgage Insurance (LMI) helps Australian homeowners enter the market earlier through allowing you to borrow a higher percentage of a property’s value. For first home buyers, particularly those struggling to save a deposit but are more than comfortable to meet their mortgage repayments, it can be a key tool to break free of the rental trap.
Through financing a higher proportion of a property’s purchase price lenders take on a higher level of risk in the event you fail to meet mortgage repayments, and the property needs to be repossessed and resold. LMI is therefore paid by you to insure your lender against loss should this happen. It is important to be aware that LMI only covers the lender if you default on your loan payments and the lender is unable to secure the full outstanding debt still owing, when they sell your property. LMI does not provide you with any cover.
The bigger the percentage of the property’s purchase price you have to borrow, the greater the amount you’re likely to pay on insurance. So if your deposit is less than 20 per cent of the value of the property, you will need to factor LMI into your home loan.
It is important to note that a higher loan to value represents a greater risk for the lender, hence why the mortgage insurance is required. However lenders mortgage insurance also has a stricter lending criteria that must be met for LMI approval, often insurers will not approve if there are any adverse aspects to the application and will usually require a minimum of 5% genuine savings to be demonstrated.
Remember that in some cases lenders may require LMI even if you have a lower deposit, depending on the type and style of property you’re purchasing – for example, some inner-city apartments or rural land. LMI is usually paid as a one-off lump sum at the time of settlement but in many cases it can also be added into the loan amount and paid off over the life
of the loan – a term known as capitalising the LMI.
If you would like more information on Lenders Mortgage Insurance please fee free to contact me.
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