Understanding Lenders Mortgage Insurance (LMI): 2021 Guide


Understanding Lenders Mortgage Insurance (LMI): 2021 Guide

Borrowing money, costs money. You can read this with every loan and every credit. This means that you always have to pay back more than the amount you ever borrowed, but it also means that you have to make an advance deposit to claim your mortgage loan. What if this doesn’t work for you or you don’t have 20% of your purchase price for the deposit? Depending on the amount of deposit you have to pay, you need lenders mortgage insurance.  

What is Lenders Mortgage Insurance (LMI)?  

Buying a home but doesn’t have enough amount for deposit? This isn’t a problem with Lenders Mortgage insurance. If the borrower doesn’t have enough money to pay the deposit for the home loan, they can take advantage of LMI to pay the remaining amount of the deposit.   

It seems that Lenders Mortgage Insurance supports the borrower with money shortage. But in actuality, this insurance policy was introduced to save lenders in case of loan defaults.  

The more you pay for your property deposit, the lesser amount you’ll need for LMI.  

For example, if you are buying a house that costs $800,000, you would need to pay a deposit of $160,000 (20% of the value of house). Now, if you have saved $60,000 for the deposit amount, you would still need $100,000 to buy the property. In such a case, lenders mortgage insurance providers will lend the remaining amount.   

Keep in mind that LMI value is non-refundable and non-transferable, i.e., if you switch the loan lender in future, you are not able to transfer the LMI to a different lender.   

When is Lenders Mortgage Insurance Required?  

If your LVR (or loan-to-value ratio) is more than 80%, and you have less deposit than 20% of your property’s value, you will need to pay the cost of LMI. It is also worth considering to check the policies of different vendors as everyone has their own rules.   

In case you don’t want to enter paying LMI, you need to start saving up the 20% deposit for your property and wait until you save the amount. Moreover, you can also consider the government’s first home loan deposit scheme to avoid LMI. If you are eligible for the loan scheme, you can purchase the property by paying only a 5% deposit amount.   

How to reduce or avoid the cost of LMI?  

In a few situations, you can reduce the cost of LMI or even avoid it. Here are the ways to follow:  

  1. Increase Your Deposit to 20%   

Obviously, you pay lenders mortgage insurance when you have a lower amount than 20% of the deposit. So, in order to avoid paying LMI, you have to save the required deposit. You can just kick-start saving the deposit, or in case you are buying the home in no time, you can ask your relatives or friends for some cash gift (or which you’ll return later).   

  1. Use First Home Buyer Scheme  

As stated earlier, if you are eligible for the government’s first home loan scheme, you can pay the loan deposit as low as 5% of the property’s value. Thus, you won’t need to pay for LMI. Note that the scheme is available only for the 10,000 buyers per year. If you are considering applying for the first home buyer’s scheme, make sure to apply at the start of the current year.  

  1. Get a Guarantor From Your Family  

Having someone to take guarantee of all the event if you will not be able to pay the loan is another option. You can ask a family member to take all the responsibility in order to save you from high LMI costs. But the decision needs to be thoughtful and taken carefully. The guarantor involved should be responsible and put his assets and even home at risk in case of return failure. Since the decision involves a lot of knowledge and planning, you can consult a professional mortgage broker for your home loan.  

  1. Compare LMI Policies of Different Lenders  

The cost of LMI varies for different lenders. Generally, lenders have contracts with the LMI providers, and they have set a specific cost by negotiating with them for their previous customers. So, before you start your loan application process, you can consult Loan Junction to guide you with all your mortgage needs and information.