If you’ve exhausted all of your options for raising a 20% home loan deposit but still want to buy a house, you can still opt to borrow from a lender. However, this comes with an extra charge. You’ll have to pay what is known as the Lenders Mortgage Insurance (LMI).
If you’re wondering under what circumstances you would need to pay for an LMI, and whether or not it beats out saving up for a loan traditionally, read on.
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What is Lender’s Mortgage Insurance?
Lender’s Mortgage Insurance (LMI) is an insurance policy that protects the lender in case you default on your home loan.
If you’re unable to cover the outstanding fee that you owe to your lender during the home acquisition process, an LMI provides lenders with a guaranteed safety net to combat any risks involved in the purchase.
This allows for more room on the part of the lender to approve you for a larger loan amount, which can ultimately save you money on interest rates.
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When Should an LMI Be Requested?
If your home loan deposit falls under the range of 20% of your desired property’s lender-assessed value, you (as the borrower) are eligible and typically required to request an LMI.
In other words, the lender will still have to assess the value of the property themselves. After the assessment, they’ll determine whether it’s viable for them to loan out to you.
If your deposit is less than 20%, you’ll need to make up the difference with an LMI. This is because your Loan to Value Ratio (LVR) reached over the 80% threshold—which is indicative of a higher risk for lenders. Therefore, borrowers are typically required to pay the insurance as a safeguard for lenders in case the original payment defaults.
Note: Every lender has a different approach. Some may have different lending regulations, different assessments on property value, and varying LMI costs. It’s crucial to request breakdowns on their property value to make sure you’re on the same page in using their service.
A Scenario Using LMI in Practice
Here’s an example to flesh out how LMI gets utilised in a real-life situation:
- Suppose that you defaulted on your home loan with an outstanding balance of $500,000.
- In order to recuperate the loss, the lender sells the property. They weren’t able to find a buyer for the agreed-upon price and had to sell the property short of the original price – for just $450,000.
- That leaves a shortfall of $50,000.
With a Lenders Mortgage Insurance (LMI), the lender will have the ability to contact the insurance provider and claim the shortfall accordingly. The LMI provider may then contact you to cover the shortfall of $50,000.
To clear it up even further, the LMI is in no way of benefit to the buyer of the property. It is a means of protection for the lender—and only the lender—in case the payment of the property from the borrower defaults.
How Much Am I Expected to Pay For An LMI?
There’s no set amount for LMI premiums, as they depend on the percentage value in relation to the property first and foremost. This numerical value is also hinged on the amount of money that you borrow to purchase the property.
An LMI could cost as little as $5,000 to as much as $500,000, depending on your home loan terms. Different lenders may also have varying associated costs, so it’s a good idea to shop around and find a deal that best suits your needs.
It’s also helpful to have your lender calculate their LMI in front of you so you can gauge the estimated cost of the insurance. This helps in case you’re unable to pay off your home loan’s outstanding balance by the end of the period.
Should I Save Up or Get An LMI instead?
It depends on your immediate ability to pay, as every situation and financial capacities are different. In truth, there are pros and cons to both saving up and using an LMI.
On one hand, saving up allows you to maintain more financial autonomy and keeps your money in your hands. It can also show the bank that you’re financially responsible and have the necessary funds saved up for a rainy day. However, it’s also an often gruelling process and can take some time (a couple of years is the norm) to accumulate.
On the other hand, an LMI allows you to get ahead of the game and keep up with fluctuating property rates while putting your savings in a safe place. It has more risk attached to it, and more costs in case you’re unable to make the necessary payments. But if you’re confident in your ability to pay and would rather have a home loan sooner rather than later, it’s a great option.
There are some ways you can also take advantage of payment policies too. For example, if your credit card has an interest-free period, you can let your savings sit there without having to worry about interest connected to your home loan being withdrawn.
Ultimately, the choice is yours. Do what’s best for you and make the decision that feels financially responsible.
There’s more than one way to secure property, and getting one through a lender with terms utilising an Lenders Mortgage Insurance is one such way to get your hands on a home quickly without too much risk attached to it.
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