Buying a home, especially if you are a first-time home buyer, you will come across many financial terms and products. The most common term is what is called “Lenders Mortgage Insurance” (LMI). Being knowledgeable about LMI can enable you to effectively plan for the total cost associated with buying a house and maybe spend less in the future. Below is essential information about LMI and its effect on home purchases.
What is Lenders Mortgage Insurance (LMI)?
LMI refers to an insurance policy that offers protection to the lender in case the borrower fails to pay the mortgage. LMI is needed when the borrower deposits less than 20% of the purchase price of the property. Basically, LMI reduces the borrower’s risk, which enables individuals to take out a loan to purchase a home with less than a 20% deposit.
How Does it Work?
If a borrower fails on a loan and the sale of the property cannot compensate the mortgage loan, the lender can claim from the insurer for the difference. Thus, even though LMI protects the lender, the premium is paid by the borrower. The premium may be paid as the loan is being received or added to the sum, which explains why it may start to raise interest as well.
When Does LMI Apply?
LMI is normally required on home loans with a loan-to-value ratio of 80% or more. That suggests you’ll require LMI if you are obtaining more than 80% of the property’s value; the specific percentage can differ between loan providers and might be influenced by the type of property and where it is located.
Benefits of LMI
Aside from representing an additional cost, there are also a number of benefits to LMI. These include:
- Provides a more accessible property market: A person can purchase their first house without needing to save their 20-percent deposit for years.
- You can borrow more: LMI can also help a person buy a more costly property than they would be able to afford without it, thanks to a smaller deposit.
Cost of LMI
LMI’s cost depends on the lender, the amount borrowed, and the percentage of the property value borrowed. It may range from just a few thousand dollars to tens of thousands of dollars and be a substantial addition to the overall cost of buying a home.
Alternatives to Avoid LMI
- Save a larger deposit: this is because if you save a deposit of 20% or more, you will often not need LMI.
- Family guarantee: Some lenders offer family guarantee products that means a family member uses their home’s equity as security for your loan.
- First home loan deposit scheme: this is designed to help eligible first-home buyers purchase a home with a deposit of as little as 5% without having to pay LMI.
(LMI) Lenders Mortgage Insurance is an essential aspect of the home buying process, particularly for those who are unable to put down a significant deposit. Despite the increased cost of purchasing a house, LMI is essential for acquiring property more quickly and can help you obtain homeownership overall. Contact Broker Advisory Services to discuss LMI in greater depth and explore options that may enable you to avoid it. The firm’s knowledgeable mortgage advisors will create and implement a tailored solution, whether you are planning to invest in asset equipment finance in Perth, use a mortgage refinance broker in Shenton Park, or hire a finance mortgage broker in Peppermint Grove. Visit www.brokeradvisoryservices.com.au or call 0414 900 990 to speak with their staff about how you can take this critical next step.
