When you’re dealing with mortgage brokers and banks, the various terms and acronyms can be overwhelming. And if you’ve been saving to purchase a home, you have most likely come across this one: Lenders Mortgage Insurance. Often shortened to LMI, Lenders Mortgage Insurance may be a fee that you need to pay when you borrow more than 80% of the total value of land/construction.
Saving up a home deposit of 20% of the purchase price can be a huge challenge. If you are keen to enter the property market but haven’t reached that 20% mark, you may still be able to obtain a loan from a lender to make your purchase. When loaning to borrowers with a deposit that is less than 20%, you may need to pay Lenders Mortgage Insurance (LMI).
Lenders Mortgage Insurance is a type of insurance that protects the lender, whether it’s a bank or other financial institution. LMI covers any shortfall that might occur if you were unable to meet your loan repayments and your property sale price would not cover your outstanding loan balance.
Although the borrower is generally the party who pays the cost of the Lenders Mortgage Insurance, LMI doesn’t protect you or any guarantor you may have for your loan — it is specifically for the lender. For protection for you or your guarantor in case of losing your job or similar, you would need to look at taking out Mortgage Protection Insurance.
When considering how much Lenders Mortgage Insurance will cost, there are a few variables that can impact what you will pay. These include:
Lenders Mortgage Insurance generally needs to be paid when you are borrowing more than 80% of your property’s value.
Many lenders add the cost of the Lenders Mortgage Insurance to your loan, rather than have you pay this amount upfront and the additional cost will be reflected in your loan repayments.
When ascertaining whether you will need to pay LMI, you might also come across another finance acronym: LVR, which stands for Loan-to-Value Ratio. Your LVR is a figure that represents the amount you’re borrowing as a percentage of the value of the property you’re purchasing. Loan providers use LVR to determine the risk of the loan, with a higher LVR representing a higher risk to the lender and a lower LVR representing less risk.
While you might be put off at the additional expense of Lenders Mortgage Insurance, it needs to be noted that LMI enables you to take out a loan to purchase your home sooner.
Rather than put off your entry into the property market for many more months or years while you save the full 20% deposit, LMI means you can potentially borrow with as little as a 5% deposit.
Entering the property market faster can make a big difference to your potential equity in years to come, or your ability to secure the home and land you want at the right price.
If paying LMI is something you want to avoid, the number one way to do so is to ensure you have at least 20% saved for your deposit.
A few other situations that might see Lenders Mortgage Insurance waived include:
When it comes to deciding when to purchase a home and the best loan option for your unique circumstances, a qualified and transparent finance professional should be able to explain all your options to you.
For guidance in establishing how much you might need to budget to build your dream home, speak with the Fairhaven Homes team.
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