Planning your finances when buying a home can be tricky. Your mortgage repayments with interest are not the only costs that you have to consider. Depending on how much your deposit is, lenders mortgage insurance may be one of the additional costs you will have to factor in when planning your budget.
First things first: Lenders mortgage insurance is an insurance policy that provides extra security to your lender, not you. Therefore, it may be an extra cost that comes with little benefit to you. However, depending on the size of the loan you are taking out and your deposit, it may be a necessary expense.
Let’s have a closer look at what lenders mortgage insurance covers.
What is lenders mortgage insurance?
The name is a little confusing. Lenders mortgage insurance won’t protect you but the lender. If you can’t make your repayments due to illness or job loss, you will need mortgage protection insurance to protect your payments. Lenders mortgage insurance is an insurance policy you will have to pay if your deposit is less than 20% of your property’s value. If you default your repayments and the property is sold in an auction, but the sale doesn’t meet the full price you owe, your lender can claim the excess on the lenders mortgage insurance.
That means LMI reduces the risk for the lender (or bank) which allows them to approve higher amounts and more mortgages in general.
When am I required to get LMI?
Your lender will require you to take out LMI if your deposit is lower than 20% of the value of the property. As a rule of thumb, the higher your deposit is, the lower the risk to your lender that you will be able to make your repayments.
If your LVR is higher than 80%, your lender will require you to take out LMI to add extra security to your transaction. However, not all lenders have the same requirements and it’s always worth checking their policies.
What are the benefits?
You are better off not paying LMI in the first place. By putting down a higher deposit, you may be able to save up to a few thousand dollars. However, LMI will allow you to take out a mortgage if you meet the general requirements but haven’t had the chance to save up enough money to pay a 20% deposit.
Under certain circumstances, it may be worth paying the additional costs. If you find your dream property, you may have to act quickly to secure it. While adding more to your bill can taint the victory, it will be worth it if you are living in a place you love. In some cases, your repayments will also be lower than the rent you were paying before, whether you add LMI to it or not. If it saves you money in the long run, taking out LMI will definitely pay off.
How much is lenders mortgage insurance?
The size of your loan and the size of your deposit will affect how much you have to pay in LMI. You can figure out how much you need to pay by using a lenders mortgage insurance calculator.
If you are asked to take out lenders mortgage insurance, usually you can choose if you would like to pay it all at once or if you prefer to add it to your loan. When calculating LMI into your loan, you will pay interest on it to your lender, in addition to the interest you already pay on your loan. One thing to keep in mind, if you choose to switch your lender in the future, you may have to pay for a new policy. LMI premiums are often non-refundable and can’t be transferred to your new loan provider.
Which factors impact my LMI?
When figuring out how much you would have to pay for lenders mortgage insurance, you have to consider multiple factors.
First of all, it is important to know the value of your property and your full loan amount. A higher loan generally means a higher risk to a lender. Therefore, your insurance amount may be higher as well. Secondly, you need to know how much you pay as a deposit. Again, a lower deposit amount increases the risk of missed or defaulted payments for your lender. You may have to pay a higher insurance premium to make up for that.
Another important factor is if you plan to live in your property or if it will be rented out to tenants. For most lenders and insurers, it makes a difference if you plan to buy a home or a commercial property. Often, commercial properties require a more expensive LMI, while you will pay less if you plan to live in the property yourself.
Additionally, it may be important to consider your current status of employment. A casual job may seem a little riskier, while a solid full-time job will inspire more confidence in your ability to meet your repayments. However, it will depend on your lender and which insurer they choose to determine if that affects the amount of LMI you will have to pay.
Can I avoid taking out LMI?
In general, the easiest option to avoid LMI is to save up for a higher deposit. If you can put down 20% of your property’s value (or more) you won’t have to pay LMI. Alternatively, if you currently don’t have the cash to do it, it may be sensible to wait a little longer until you have saved enough to do so. If you want to lower the amount you have to pay for LMI but don’t have the patience to keep saving (or you really want to get your hands onto a certain property), you can also get a family member to sign as a guarantor. If their financial situation is suitable, this may lower your overall costs for LMI.
However, there is another option. The Government has recently launched the new First Home Loan Deposit Scheme. If you are a first homeowner and eligible, you may be one of the lucky 10,000 Australians per year that will be able to get an LMI-free home loan and will only be required to pay 5% deposit. This will allow you to enter the real estate market much earlier than you normally would be able to.
Want to learn more?
Here at Oiyo, we’re all about giving you the knowledge and tools to help make money a little less daunting. So if you want to learn more about finance, there are plenty of useful reads to have a look at. Plus, we cover other types of insurance including life insurance, home insurance, health insurance, and more.
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