Buying a house is one of the biggest investments you’ll ever make. But if you’re taking out a home loan, there’s a good chance you’ll need to pay for Lenders Mortgage Insurance (LMI). In this article, we’ll take a closer look at LMI and what you need to know before you sign on the dotted line.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is a type of insurance that protects your lender in case you default on your home loan. If you’re unable to make your mortgage repayments, your lender can make a claim on your LMI policy to recover their losses.
LMI is usually required when you’re borrowing more than 80% of the property’s value. This is because lenders see borrowers with less than a 20% deposit as a higher risk, and LMI helps to mitigate that risk.
How is LMI Calculated?
The cost of LMI varies depending on a few different factors, including:
- The size of your deposit
- The value of the property
- The type of loan you’re taking out
- The lender’s LMI premium rates
Generally, the smaller your deposit, the higher your LMI premium will be. LMI can add thousands of dollars to the cost of your home loan, so it’s important to factor it into your budget when you’re planning to buy a property.
Who Pays for LMI?
LMI is usually paid for by the borrower, but in some cases, the lender may cover the cost. If the lender covers the cost, they may charge you a higher interest rate to recoup their losses.
If you’re taking out a home loan with a guarantor, such as a family member, you may be able to avoid paying LMI altogether. This is because the guarantor is essentially providing security for your loan, reducing the lender’s risk.
Is LMI Worth the Cost?
LMI can add thousands of dollars to the cost of your home loan, so it’s natural to wonder whether it’s worth it. The answer depends on your individual circumstances.
If you’re unable to save a large deposit and you need to borrow more than 80% of the property’s value, LMI may be your only option. In this case, it’s worth considering whether it’s still financially viable for you to buy a property at this time.
On the other hand, if you have a larger deposit or you’re able to wait and save more money, you may be able to avoid paying LMI altogether. This can save you thousands of dollars in the long run.
How Long Does LMI Last?
LMI is usually a one-off payment that covers the life of your home loan. This means that once you’ve paid for LMI, you won’t need to pay for it again, even if you refinance your loan or switch lenders.
However, it’s worth noting that LMI is not transferable between properties. If you sell your current property and buy a new one, you’ll need to pay for LMI again if you’re borrowing more than 80% of the new property’s value.
What Are the Alternatives to LMI?
If you’re unable or unwilling to pay for LMI, there are a few alternatives you can consider:
- Save a larger deposit: If you’re able to save a larger deposit, you may be able to avoid paying LMI altogether.
- Find a guarantor: If you have a family member who is willing to act as a guarantor for your loan, you may be able to avoid paying LMI.
- Look for a lender with lower LMI premiums: Some lenders offer lower LMI premiums than others, so it’s worth shopping around to find the best deal.
Conclusion
Lenders Mortgage Insurance is a type of insurance that protects your lender in case you default on your home loan. It’s usually required when you’re borrowing more than 80% of the property’s value, and it can add thousands of dollars to the cost of your home loan.
While LMI can be expensive, it may be your only option if you’re unable to save a large deposit. If you’re considering taking out LMI, it’s important to factor the cost into your budget and to shop around to find the best deal.
If you’re unsure whether LMI is the right choice for you, it’s worth speaking to a financial advisor who can help you weigh up your options.