- Posted 14 Jan
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As a first home buyer, you’re excited at the prospect of owning your first home, being able to decorate how you want and finally having your own backyard with a deck and bbq area.
You’ve started doing some research into getting your first mortgage and keep coming across this lenders mortgage insurance (LMI). You ask others about it, and no-one can explain what it really is and why you need it.
Before you commit to a home loan, it’s important that you understand what LMI is and how it affects your mortgage.
Lenders Mortgage Insurance Explained
LMI is the insurance that protects your lender in case you’re unable to meet the repayments on your loan. While it’s main purpose is to protect the lender, by initiating LMI, you can get into your property sooner, because you don’t have to come up with a 20% deposit.
If you don’t wish to pay LMI, then you must have at least 20% deposit in order to bypass the insurance.
The biggest thing you need to remember about LMI is that it protects your lender, not you. So if you default on your mortgage, it doesn’t cover you, it covers your lender, they receive the benefit of the insurance, not you.
There are two major LMI providers in Australia. They are Genworth and QBE LMI>
Do I Have to Pay Lenders Mortgage Insurance?
If you are borrowing more than 80% of your home loan, you don’t have an option, it is a mandatory requirement and your lender will require you to pay this before agreeing to lend you any funds.
LMI is a one off fee, so no ongoing payments like other insurances may offer. You can choose to pay it upfront at the time of your loan settlement, or you can capitalise it into your home loan amount so that it is paid off in increments.
How Much Will LMI Cost?
The amount that you pay will vary in price, as it is dependent on a few factors. The fee will be determined based on the amount that you need to borrow, how much deposit you’re able to provide and what your loan-to-value ratio is.
In most instances, the higher your loan-to-value ratio (LVR) the more you’ll need to pay in LMI.
If you were to borrow 95% of the property’s purchase price, your fee will be larger than someone who is borrowing 85%. And if you’re getting into the property investing market, then you can expect to pay even more in LMI on the second home, because there is a perceived higher risk if you have two or more loans, so this increases the LMI fee.
The main benefit of opting to pay lenders mortgage insurance is that it will allow you to get into a property with a 10% deposit. If you want to avoid LMI, then you’ll need to have at least a 20% deposit or more.
If you need help with your first home loan and understanding how LMI will affect your overall costs, chat with our team at Australian Credit and Finance today.