What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is a fee charged by the lenders, generally when your deposit is less than 20% of the purchase price.
LMI can be paid as a once-off lump sum at the time of settlement but in many cases it is added into the loan amount and paid off over the life of the loan. This is known as ‘capitalising the LMI’.
Why is Lenders Mortgage Insurance charged?
Even if you have a strong credit history and have always paid your bills on time, lenders consider you to be a borrower with ‘higher risk’ if you contribute a deposit less than 20% of the purchase price.
As a result, lenders like to insure the loan to protect them against any loss should your loan go into default. The cost they incur to do this, is then passed onto you in the form of a LMI premium.
How much is Lenders Mortgage Insurance?
Whilst mortgage insurance premiums vary between mortgage insurers (and therefore lenders), the higher the percentage of the purchase price you need to borrow, the higher the LMI premium will be. For example, LMI will be higher if you borrow 90% of the purchase price, compared to borrowing 87% of the purchase price.
We can perform all the calculations and let you know what affect an increase in your savings will have on the LMI premium.
Who does Lenders Mortgage Insurance cover?
It’s important to understand that LMI does NOT cover you – it only protects the lender should you default on your loan.
Do you have to pay Lenders Mortgage Insurance?
No – but you generally need to save a larger deposit.
Something to keep in mind though – if it takes you another year to save your 20% deposit, property prices may have risen over that time. This means that despite have more cash available to contribute towards the purchase, you still might need to pay LMI because the type of house you could have purchased a year ago, is now selling for $30,000 more.
Some lenders will waive LMI costs for borrowers who meet a specific set of criteria.
If you’re a doctor, lawyer, veterinarian, accountant, dentist, engineer or financial planner, get in touch to see how much we can help you save on LMI costs.
Should you pay it?
Whether or not you should pay LMI will very much depend on your personal situation and answers to questions like:
- Are you buying an investment property?
- Do you have the capacity to save more cash?
- How eager are you to get into the property market?
- Is there potential to increase your contribution another way?
- What are the details of the property you are purchasing?
We can help you explore all your options, so you end up choosing what is right for you.
