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All you Need To Know About LMI
Lenders Mortgage Insurance (LMI) sounds complicated, but it’s a safety net for lenders when your deposit is less than 20% of the property’s value. Unfortunately, you have to pay for it.
Understanding LMI means knowing how property value, deposit size, and loan type work together. You can avoid paying LMI by having a 20% deposit or getting help from family or government schemes.
Key Facts about LMI
- LMI is a one-time payment added to your home loan’s total amount.
- It protects the lender, not you if you default on your home loan.
- To avoid LMI:
- Put down a larger deposit (over 20%).
- Use government programs like Keystart home loans.
- Remember, if you refinance later, LMI doesn’t go away.
What is Lenders Mortgage Insurance (LMI)?
If your deposit is less than 20% of the property’s value, you might have to pay LMI. This happens because loans with a higher Loan-to-Value Ratio (LVR) are seen as riskier by lenders.
LMI is a non-refundable fee charged to you as an upfront cost, added to your loan if your deposit doesn’t meet the lender’s requirements. It’s a way for lenders to protect themselves in case you can’t repay the loan and they can’t recover the full amount through the sale of the property.
How is LMI Calculated?
Lenders use a tiered system to calculate LMI based on:
- The value of your property.
- Your deposit size.
- The amount you borrow.
- The type of loan.
- The type of property.
Generally, the higher your LVR, the higher your LMI. Investment loans usually have higher LMI than owner-occupied loans. It’s best to get a quote from your lender since calculations can vary.
How Much Does LMI Cost?
LMI can range from 1% to 5% of your total loan amount, depending on your LVR. For example, here’s a rough estimate:
Note: These are indicative only. Actual costs can vary with different lenders.
Should You Pay LMI Upfront or Add It to Your Loan?
Paying LMI upfront is the least expensive option, but many borrowers choose to add it to their loan to spread out the cost. The downside is you’ll pay interest on both your home loan and the LMI amount. Consider using an offset account to reduce your interest.
Are There Benefits to Paying for LMI?
We usually recommend avoiding LMI, but if you can’t, here’s why it’s not all bad:
- No need for a guarantor: You won’t need someone else to secure your loan.
- Enter the market sooner: You can buy a home earlier and avoid paying rent.
How to Get LMI Waived
- Guarantor: A family member can use their home equity to help you avoid LMI.
- Home Guarantee Scheme: Government programs like the Home Guarantee Scheme can help you buy with a smaller deposit and no LMI.
- Save a 20% Deposit: Aim to save 20% of the property value to avoid LMI.
- Lender Discounts: Some lenders offer LMI discounts for certain loan products or professionals.
- Professional Waivers: Certain high-paying professions may be eligible for LMI waivers.
- Parental Help: Parents can gift money or act as guarantors to help you avoid LMI.
Who is Eligible for an LMI Waiver?
Professionals such as doctors, surgeons, lawyers, accountants, and engineers may qualify for LMI waivers, depending on the lender. Requirements often include a high credit score, a minimum annual income, and membership in a professional organization.
Pay LMI or Keep Saving?
Paying LMI:
- Lets you buy a home sooner.
- Can be a good choice if property prices are rising.
Saving a Larger Deposit:
- Reduces your mortgage repayments.
- Eliminates or lowers LMI costs.
How to Avoid LMI When Refinancing
To avoid LMI when refinancing, ensure you have at least 20% equity in your home. You can increase your equity by improving your home’s value or paying off your mortgage early. Remember, LMI isn’t transferable between lenders or loan programs.
Got More Questions?
If you have more questions or need help with LMI, check out Nfinity Financials. They assist first-time homebuyers in purchasing their own homes and avoiding LMI.
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Lenders Mortgage Insurance (LMI) is a type of insurance that protects lenders against the risk of a borrower defaulting on their home loan. This insurance is typically required when the borrower has a down payment that is less than 20% of the property’s purchase price. Here’s an overview of LMI:
Key Points About Lenders Mortgage InsurancePurpose and Protection
- Lender Protection: LMI protects the lender, not the borrower. If the borrower defaults on the loan and the property is sold for less than the outstanding loan balance, the insurer covers the shortfall.
- Required for High LTV Loans: Loans with a high loan-to-value (LTV) ratio, generally over 80%, typically require LMI.
Cost and Payment
- Premium Cost: The cost of LMI varies based on the size of the loan and the LTV ratio. The premium can be a significant amount, sometimes thousands of dollars.
- Payment Options: Borrowers can usually pay the LMI premium upfront or capitalize it into the loan, spreading the cost over the loan term.
Calculation
- Factors: The LMI premium is calculated based on factors such as the loan amount, the size of the borrower’s deposit, and the lender’s specific requirements. Different insurers may have varying premium structures.
- Online Calculators: Many lenders and mortgage insurance providers offer online calculators to estimate the LMI premium based on specific loan details.
Advantages and DisadvantagesAdvantages
- Loan Approval: LMI can make it possible for borrowers to secure a home loan with a smaller deposit, thus enabling homeownership sooner.
- Market Access: It allows lenders to offer loans to a broader range of borrowers, including those with higher LTV ratios.
Disadvantages
- Cost to Borrower: The borrower bears the cost of LMI, adding to the overall expense of purchasing a home.
- Non-Refundable: If the borrower pays the LMI premium upfront and later refinances or repays the loan early, the premium is typically non-refundable.
Alternatives to LMI
- Lender-Specific Products: Some lenders offer products designed to help borrowers avoid LMI, such as family guarantees or structured loan options.
- Increased Deposit: Saving a larger deposit (20% or more) can eliminate the need for LMI.
Example of LMI in Practice
- Scenario: A borrower wants to purchase a home valued at $500,000 but only has a $50,000 deposit (10%). The lender requires LMI for the 90% LTV loan. The LMI premium might be added to the loan, increasing the total amount borrowed and the monthly repayments.
Considerations for Borrowers
- Loan Terms: Understand the terms and conditions of LMI, including how it impacts the overall cost of the loan.
- Shop Around: Different lenders and mortgage insurers may have varying premium rates and conditions, so it’s beneficial to compare options.
By understanding LMI and how it works, borrowers can make informed decisions when purchasing a home with a smaller deposit.