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Understanding Home Loans – Loan Mortgage Insurance (LMI)

insurance

Lenders Mortgage Insurance (LMI) is another one of those terms use by brokers and bankers…….but what does it actually mean? In this month’s BLOG, I am going to cover LMI and what’s it all about!

Lenders Mortgage Insurance is one of the most common ways to help achieve the dream of homeownership sooner, especially for borrowers that don’t have a large deposit. LMI can either be paid upfront or added into the loan, which means payments are made over the life of the loan.

Typically LMI protects the bank and there is a perception that banks use this as another way to “slug” to borrowers. This is actually not the case at all – albeit it does feel this way! LMI was introduced into Australia in 1965 to enable first home buyers to “bridge the deposit gap” which was at that time, and still is, a significant impediment to achieving homeownership.

By its true definition Lenders mortgage insurance (LMI) is a one off insurance premium that has a purpose of protecting the lender in the event that you default on your mortgage. Even though the property itself acts as security for the loan, once default costs and interest are added, the sale of the property may not be enough to cover the outstanding debt should you default. This is particularly true if property prices have stagnated and when sold the property achieves for less than what it was originally purchased or valued at. LMI covers the lender for the loss.

The cost of LMI will vary depending on the lender you have your loan with, and the size of your loan, however an approximate cost is 3% – this percentage is very good guide. How this works is that if your loan limit is 95% to the value of the property 3% of the total 95% will be represented by LMI and 92% will be what the bank will give you. This would mean that you will require an 8% of your own funds. This catches people out so be sure to get a clear explanation from your broker or banker.

For example – $450,000 purchase price x 3% = $13,500 of LMI.

It is important to note that there may be a separate approval required for higher LVR applications. When a mortgage insurer reviews an application it is purely around assessing the risk profile of the borrower and their likelihood of repayment. Where this is different to how banks review their applications, they pay a greater emphasis on the depth of your relationship whereas the mortgage insurer bases their decision on risk and credit score.

Given that LMI will increase your loan here are some ways to avoid LMI

  1. Provide a 20% deposit
  2. Source a guarantor for your loan, (which means equity in their property)
  3. Source products which may not have LMI – a lot of the government schemes don’t have LMI
  4. Seek an exemption to LMI – if you are within a professional, e.g. doctors, lawyers, accountants etc.

Whatever may be the case, LMI is common in Australia especially for client just starting out, so don’t think you are getting ripped off. A good mortgage broker will be able to guide you to a product that best suits your needs and the avoidance of paying LMI where possible.

I wish you all the best in your home loan journey

Claire Ferguson – InReach Finance

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