If you are looking to buy a home, chances are you’ve encountered the term Lenders Mortgage Insurance (LMI). Perhaps you’re wondering what exactly Lenders Mortgage Insurance entails. Is it truly worth the cost? When should one opt for LMI, and how can one avoid the burden of its hefty premium?
With property prices on the rise in Australia, accumulating sufficient funds can be pretty challenging for homebuyers. LMI serves as a lifeline for those aspiring to own a home but struggling to save up for a deposit.
In this comprehensive guide on Lenders’ Mortgage Insurance, we aim to address all your queries. Continue reading to uncover the essence of LMI and decide whether it’s a viable option for you.
What is Lenders Mortgage Insurance (LMI)?
LMI, or Lenders Mortgage Insurance, is an insurance that lenders take out to safeguard themselves against high-risk borrowers in case borrowers default and the property is sold for less than the outstanding mortgage amount.
It’s important to note that LMI solely benefits the lender, and as a borrower, you can never make a claim on it.
Unlike other types of insurance, such as home and contents or disability insurance, LMI doesn’t offer protection if you lose your job or face financial difficulties.
How Does Lenders Mortgage Insurance (LMI) Work?
Lenders Mortgage Insurance (LMI) is an insurance policy paid by borrowers who have a deposit of less than 20% of the property’s price. This fee is paid to the lender at settlement, who then transfers it to the insurer.
The policy remains active throughout the life of your mortgage, regardless of its duration. Depending on the lender, you have the option to either pay the LMI fee in full at the beginning or include it in your mortgage repayments.
The LMI rate varies depending on the lender and several other factors, primarily based on the property’s price and the deposit amount. Additionally, LMI incurs a stamp duty fee that varies between states.
Ways to Avoid Paying Lenders Mortgage Insurance (LMI)
If you’re looking to save on LMI costs, here are some practical strategies to help you avoid paying them altogether:
1. Check Your Eligibility for a Professional Home Loan
Certain professions, such as doctors, dentists, accountants, or engineers, may qualify for waived LMI on their home loans. Lenders often offer special discounts and loan conditions to these professionals due to their high incomes and stable employment tenure.
While the eligibility criteria and discounts vary among lenders, it’s possible to have LMI waived for these borrowers.
2. Compare Different Lenders
Take the time to compare various lenders when searching for a home loan. Some lenders may discount or even waive LMI for eligible borrowers, so it’s worth exploring different options.
For instance, some lenders might allow you to avoid LMI with a deposit as low as 15% instead of the standard 20%.
3. Get a Relative to Be Guarantor on Your Loan
If you have a family member or close relative who’s willing to assist you, you can list them as guarantors for your home loan. By leveraging the equity in their home, usually an immediate family member, you can avoid paying Lenders Mortgage Insurance (LMI).
It is important to understand that becoming a guarantor comes with legal obligations. If you are unable to repay your home loan, the responsibility will fall on the guarantor.
4. Take Advantage of Government Schemes
If you’re struggling to save up a deposit that allows you to avoid LMI, explore government schemes designed to support home buyers.
The First Home Loan Deposit Scheme, run by the federal government, helps first-time home buyers purchase a property with a deposit as low as 5% while avoiding LMI charges.
Additionally, programmes like the First Home Owners Grant can boost your deposit, helping you bypass LMI.
5. Save a Larger Deposit
Lastly, here’s the most obvious way of going about it saving a larger deposit. It remains one of the most reliable ways to avoid LMI. If possible, aim for a 20% deposit or higher.
Even if you can’t reach 20%, remember that a higher deposit reduces your LMI costs.
LMI or No LMI: Which Way to Go?
While avoiding an LMI premium can save you money, it’s essential to consider the potential trade-offs. There are situations where paying LMI may be worth it:
1. If it will take you a long time to save a 20% deposit:
In capital cities, it may take years to accumulate the six-figure deposit required to reach the 20% mark. Paying a small sum in LMI now might enable you to enter the property market sooner.
2. If you’re paying high rent and your dream property becomes available:
When the perfect property arises, you need to weigh the extra cost of LMI against the opportunity to secure your dream home. Unlike rent payments, mortgage repayments contribute to owning an asset.
3. If you’re buying in a strong market with rising prices:
Waiting to save a 20% deposit in rapidly appreciating markets could mean continually chasing rising property prices. Choosing to pay LMI upfront might prove more financially beneficial in the long run.
Pros and Cons of Lenders Mortgage Insurance (LMI)
- Allows you to enter the market faster without years of saving for a large deposit.
- In a rising market, buying with LMI can be more cost-effective in the long run.
- LMI costs can be included in your loan, eliminating the need for an upfront payment.
- LMI, potentially amounting to thousands or tens of thousands of dollars, adds an additional cost to your home purchase.
- Purchasing with a small deposit means borrowing more money, resulting in higher interest charges.
LMI and Refinancing
Regrettably, the LMI cannot be transferred when refinancing with a different lender. Each new loan necessitates a reassessment of the loan-to-value ratio (LVR), potentially prompting the need for LMI in high-risk scenarios.
However, if your property value has appreciated, there may be equity that can be factored in. To ascertain the requirement for LMI during refinancing, we recommend consulting one of our knowledgeable home loan experts.
How Can Lend & Co. Help You With Lenders Mortgage Insurance (LMI)?
At Lend & Co., we are committed to helping you find the best deal when you’re in the market for home loans. Our team of experts can help assess whether LMI is required on your loan and negotiate with lenders to get the lowest rate available.
Here’s how we can help:
1. Provide advice on LMI:
Whether it’s saving a larger deposit or exploring guarantor options, we’ll guide you through the process. Our knowledgeable mortgage brokers will explain the intricacies of LMI, its requirements, and how to avoid paying it.
2. Compare LMI policies:
We’ll help you navigate the complexities of LMI policies by comparing offerings from different lenders. By discussing factors like the overall cost, coverage, and eligibility criteria in detail, we ensure you find the best policy for your home loan needs.
3. Negotiate LMI premiums:
Lend & Co. can leverage our relationships with lenders to negotiate lower LMI premiums on your behalf. We strive to secure the most favourable terms, using our market knowledge to ensure you get the best deal possible.
4. Help with paperwork:
Applying for LMI often involves extensive paperwork. Our mortgage brokers will assist you in completing the necessary forms and guide you through the required documentation, making the process smoother and more efficient.
5. Provide ongoing support:
We offer unwavering support to our clients throughout the entire loan journey. Our dedicated mortgage brokers are readily available to assist you in comprehending your LMI policy and addressing any enquiries or uncertainties. Moreover, we are always available to resolve your queries post-settlement too.
Crack the Code of Lenders Mortgage Insurance With Lend & Co.
Understanding Lenders Mortgage Insurance is crucial when navigating the home loan process.
By familiarising yourself with the ins and outs of LMI, exploring strategies to avoid it, and seeking professional guidance from Lend & Co., you can make informed decisions and secure your dream property. Our personalised service, expert guidance, and extensive lender options ensure that we’ll be with you every step of the way.
Don’t let LMI stand in the way of your homeownership goals. Work with Lend & Co. to utilise these genius strategies to skip the hefty premiums and save your hard-earned cash.