Introduction
Buying a house is an exciting milestone for most people. However, many homebuyers are unaware of the hidden costs that come with homeownership. One of these costs is Lenders Mortgage Insurance (LMI). In this article, we will debunk some of the common myths surrounding LMI and provide you with ways to avoid it.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is a type of insurance that protects the lender in case the borrower defaults on their mortgage repayments. LMI is generally required by the lender when the borrower has a deposit of less than 20% of the property’s purchase price.
Myth 1: LMI Protects the Borrower
One of the most common myths about LMI is that it protects the borrower. However, this is not the case. LMI only protects the lender, not the borrower. In fact, if the borrower defaults on their mortgage repayments, they are still liable for the outstanding debt.
Myth 2: LMI is a One-Time Fee
Another common myth about LMI is that it is a one-time fee. However, this is not always the case. LMI is generally calculated based on the size of the deposit and the loan amount. The larger the loan amount and the smaller the deposit, the higher the LMI premium. LMI is usually added to the loan and amortized over the life of the loan, which means that the borrower will be paying interest on the LMI premium.
Myth 3: LMI is Mandatory
Many borrowers believe that LMI is mandatory. However, this is not true. While most lenders require LMI for borrowers with a deposit of less than 20%, there are other options available to avoid LMI.
Ways to Avoid LMI
Here are some ways to avoid LMI:
Save for a larger deposit
The most obvious way to avoid LMI is to save for a larger deposit. If you can save at least 20% of the property’s purchase price, you can avoid LMI altogether.
Get a guarantor
Another way to avoid LMI is to get a guarantor. A guarantor is someone who agrees to guarantee your loan. This means that if you default on your mortgage repayments, the guarantor will be responsible for paying the outstanding debt. Having a guarantor can help you avoid LMI, even if you have a small deposit.
Use a family pledge
A family pledge is a type of loan where a family member provides their property as security for your loan. This means that you can borrow up to 100% of the property’s purchase price without having to pay LMI.
Conclusion
Lenders Mortgage Insurance is a cost that many homebuyers are unaware of. It is important to understand what LMI is and how it works to avoid any surprises down the line. While LMI is generally required for borrowers with a deposit of less than 20%, there are other options available to avoid it. By saving for a larger deposit, getting a guarantor, or using a family pledge, you can avoid paying LMI and save yourself thousands of dollars in the long run.