What is Lenders Mortgage Insurance (LMI)?
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Lenders Mortgage Insurance (LMI) is a fee banks and other finance lenders charge borrowers when they are deemed high risk. Usually, this is when their deposit is less than 20% of their property's purchase price. It protects the lender in the event that the borrower cannot make the repayments on their home loan.
How does it work?
The borrower pays the LMI payment in a lump sum at settlement
Many lenders will offer to finance LMI into your home loan, so that it is added to your monthly mortgage payments
This means you won’t need to have the funds upfront, but it also means you’ll need to pay more interest on your loan
When do I need to pay LMI?
Most financial institutions will require you to pay lenders mortgage insurance if your deposit is less than 20% of the property purchase price.
How much does LMI cost?
There is no simple answer to this question as each LMI provider calculates the cost of LMI slightly differently.
The size of your deposit
As soon as your deposit drops below 20% of the property's purchase price, you’ll need to pay LMI.
Most banks only charge LMI if your deposit is less than 20% of the property purchase price.
Ask for help
If your parents are in the position to offer financial support, you shouldn't feel ashamed to ask for their help.
Get a guarantor
This reduces the risk of the loan by putting forward some of the equity in their property as security.
By doing so, the guarantor reduces your LVR to less than 80%.
Buyers are better off paying LMI rather than saving for a bigger deposit.
Consider disclosing your occupation
LMI providers are willing to lend more money to doctors, dentists and lawyers than they are to people working in high-risk industries, as these professions are consistently in high demand and are also well paid.
If you are a doctor, dentist or a lawyer, let your lender know, and ask them to waive your LMI premiums.
Is it better to pay LMI or save more?
There's no right or wrong answer
You need to take into account how the market is tracking to work out which strategy is best for you
If property prices are falling, it makes more sense to delay your purchase and save for a bigger deposit.
On the other hand, taking out a loan with a higher loan-to-value ratio will help you get onto the property ladder far sooner but it will also most likely mean paying more money in interest over the course of your mortgage.