Lenders Mortgage Insurance And How To Avoid It
Who really wants to pay a fee if it can be avoided? Whether you’re a first homeowner buyer, an investor or simply wish to re-finance your existing mortgage, you are probably aware that buying property costs more than the price of the property you’re interested in. Unlike Stamp Duty, Lenders Mortgage Insurance (LMI) is one of those fees that not everyone is subject to. Let’s look at it and see what kind of financial position you need to be in to avoid it altogether.
What Is Lenders Mortgage Insurance?
LMI is a fee that banks add to the cost of your loan if you have less than a 20% deposit saved to purchase a property. Effectively, a bank will take out an insurance policy to protect themselves in case of a borrower defaulting on their mortgage repayments. LMI doesn’t protect you the buyer; it exists solely to protect a lender’s interest in your property. Insurance that protects you, the buyer is called mortgage protection insurance.
How Is LMI Calculated?
The cost of LMI does vary depending on the lender, the price of the property and the amount of deposit you have saved. LMI is based on what’s called the Loan Value Ratio or LVR. In a nutshell, the Loan Value Ratio is calculated as a percentage that measures the property’s value in relation to the amount of money being borrowed to purchase it. If you have a Loan Value Ratio of 80%, it means that you have 20% of the asking price of the property as a deposit and need to borrow the balance. The lower your LVR, then the less likely it is that you will need to pay LMI.
So How Do I Avoid LMI?
If you have a 20% deposit or higher, you’re in an excellent position to find a product from a lender that doesn’t attract LMI. With interest rates at a historic low right now, some lenders are waiving or charging minimal LMI for buyers with only a 15% deposit. Not all lenders publicise their specials regarding LMI, so chances are you could easily miss an offer that may be of benefit to you. That’s why it helps to get in touch with a mortgage broker. We have access to specials you may not be aware of.
One other thing, if you’re a first homeowner you may be eligible for a government backed scheme that waives LMI. Have a read of our blog “Buying a home has never been more affordable than it is NOW” to see if you may be eligible. It’s worth mentioning that Government backed schemes have strict income thresholds and caps on purchase prices. For more info click here: https://www.firsthome.gov.au and https://www.nhfic.gov.au/what-we-do/support-to-buy-a-home/first-home-loan-deposit-scheme .
Give us a call to see if you qualify for a loan without the hassle and cost of paying LMI.
Written by Jason Pestano