Find out what it is, how it works, and how it can open the door to home ownership sooner.
When it comes to buying or building a home, pulling together a home loan deposit is a major financial commitment. In fact, many would-be first time buyers struggle to get over this hurdle, preventing them from entering the property market. Enter lender’s mortgage insurance (LMI).
If you’re not able to make a full deposit, all is not necessarily lost — some lenders may still consider you for a home loan. If your deposit is less than 20%, but you otherwise qualify for a home loan, your bank or lender may still approve your loan application provided you take out LMI.
LMI protects your lender against financial loss if you default on your repayments and your property is repossessed and sold. It will cover any difference between the remaining balance on the loan and the sale price.
It’s important to remember that LMI protects the lender, not you. If you’re looking for protection for yourself, you should consider mortgage protection insurance options.
What are the benefits for you?
While LMI is designed to protect your lender, there could still be some benefit for you. Mainly, it opens the door to home ownership. From high risk borrowers to those that are struggling to save a full 20% deposit, LMI may make it easier and quicker to secure a home loan.
Of course, you should do your research before you take the leap. Make sure you understand all associated costs and the terms of your loan.
How much does it cost?
The cost of LMI varies depending on your loan-to-value ratio and the amount of money you’re looking to borrow. Factors that influence the cost include:
- the amount of your deposit
- if the property is owner occupied or an investment
- your employment status
- the LMI provider used by your lender.
Most LMI lenders will request the LMI amount be paid in a lump sum. You have the choice of paying it upfront or adding it to the balance of your home loan to be paid off over time through your loan payments.
What happens if you refinance your loan?
Keep in mind that it’s not possible to transfer an LMI to a different lender.
If you’re thinking about refinancing your loan, your mortgage is terminated and you make new arrangements with your new lender. If your loan-to-value ratio is still lower than 80% when you do this, you may be required to take out another LMI to secure your new loan.
Are LMI premiums refundable?
Generally speaking, LMI premiums are non refundable, but it depends on the lender you go through.
There are certain circumstances where you may be able to apply for a partial refund. For example, if your loan is repaid early enough (within two years of settlement) you may receive a partial refund. Each case is different and you will have to discuss the specific terms and details with your lender.
Is LMI the right fit?
Whether or not LMI is a right fit for you depends on your individual circumstances. If you’re finding it impossible to save for a deposit, it could be an option to help you get onto the property ladder.
That being said, avoiding LMI will save you money in the long run. The easiest way to avoid having to pay LMI is to ensure you have a deposit of 20% or more. Check out our top tips to boost your deposit savings, or read up on our low deposit solutions.
For more information, speak to one of our consultants who can help you find the right financial solution for you.