About to take out your first home buyer loan? Getting those first time buyer anxieties over the formality of the process?
Searching for your first home can be overwhelming, especially if you’re unfamiliar with the jargon and ins and outs of the process. Lenders Mortgage Insurance (LMI) may sound like something that sits right at the top of your list of anxieties – after all, it sounds pretty intimidating!
What is Lenders Mortgage Insurance Australia? And how does this fit into your first time home buyer experience? In this blog post we will delve into exactly what LMI is all about, and talk through some helpful tips to make sure you stay informed along every step of the journey when getting a home loan.
What is Lenders Mortgage Insurance?
Lenders mortgage insurance NSW (LMI) is a type of insurance program in Australia that provides cover to lenders on home loans if the borrower defaults on their repayments.
The insurance protects lenders from the financial risk associated with lending money for a homeowner’s investment.
How does LMI work?
Generally, when you borrow more than 80% of the purchase price of a property, your lender will require you to take out LMI to protect against any losses if you are unable to meet your loan obligations and they start foreclosure proceedings. Depending on how much you’re looking at borrowing, the cost of Lenders Mortgage Insurance could be quite expensive.
It may also give borrowers access to lower interest rates, as lenders are willing to accept higher levels of risk because they know that should something go wrong, there is insurance protection available for them. This can help new homeowners get into the market sooner or buy properties closer to where they want without taking too big a risk financially.
What does Lenders Mortgage Insurance cover?
The LMI premium covers the lender for the life of the loan, which is usually up to 30 years.
This type of coverage applies not just to first time home buyer loans to refinance loans where there is more than 80% loan-to-value ratio or LTVR. This means that the amount borrowed is greater than 80% of the value of the security being offered.
How much is LMI?
So how is Lenders Mortgage Insurance calculated? It will largely depend on three things:
- your lender;
- how much you can borrow;
- the lender’s insurer;
- the size of your loan;
- purpose of the property; and
- the size of your deposit.
Your lender will usually pass the cost of lenders mortgage insurance on to you as a fee.
How is LMI paid?
Here’s an example to illustrate this better:
Sarah loaned $400,000 to buy a home. Her deposit was less than the lender’s requirement of 20%, so she paid the cost of the lenders mortgage insurance.
Down the line Sarah loses her job. The financial hardship of being jobless made her unable to pay her mortgage repayments. The lender took her home over and sold it for $300,000 — less than the value of the outstanding loan amount.
The shortfall was $90,000. Sarah still has to pay this shortfall amount. The lender makes a claim on the LMI policy and the LMI insurer pays the lender $90,000. The LMI insurer will seek Sarah for the repayment. She then has to repay the $90,000 shortfall to the LMI insurer.
When do you pay Lenders Mortgage Insurance?
You can pay the LMI premium to the lender at settlement. Or you can also include the cost as a part of the loan. This way, the cost of lenders mortgage insurance will be added to your loan repayments over the term of your loan.
To know the best way to go about this, we recommend talking to your lender or mortgage broker to get details of what options are available for you.
How to avoid Lenders Mortgage Insurance
Of course one sure fire way of avoiding the LMI is to have a deposit of 20% of the property value, or more. But if it can’t be helped, below are ways on how to avoid LMI:
- Check your eligibility for professional home loans with a home loan broker. Doctors, dentists, accountants, engineers, and charity workers are usually eligible for a Lenders Mortgage Insurance waiver or discount.
- Get a guarantor home loan. Your parents or relatives can use their home equity to secure your home loan, thereby exempting you from paying the cost of lenders mortgage insurance.
- Apply for government schemes that enables you to avoid paying the LMI like the Home Guarentee Scheme (formerly called the First Home Loan Deposit Scheme) or the First Home Owners Grant.
- Shop around from multiple lenders. Some of them are more lenient than others and will allow you to have a less than 20% deposit without the need to pay LMI. You can ask a mortgage broker to help you liaise with them.
Want to embark on a stress-free first home buying journey? Reach out to us at Stryve Finance by clicking the button below.
