Buying your new home is an exciting and exhilarating feeling. However, it can also be a minefield of legal jargon and hidden fees which can put a dampener on what should be one of the most thrilling milestones in life. Today we’re going to discuss Lenders Mortgage Insurance, what it is and under which circumstances you’re required to pay it.
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) protects the lender in the case that you default on your home loan. If you were to stop paying your home loan repayments, the lender may need to sell your property to recoup their costs and, in that case, there may be a shortfall depending on how long your mortgage has been active, your property’s current valuation and how much you have repaid on the loan.
Do I have to pay LMI?
Generally, lenders will require anyone who borrows more than 80% of their loan value to pay lenders mortgage insurance. So if you do not currently have a deposit higher than 20% of the total loan value required to purchase your home, then you may be required to pay LMI.
A 20% deposit is generally viewed as enough of a buffer to protect lenders from any potential decline in the value of a property, so they can recover any amount owing to them if you were to default.
How much is LMI?
LMI costs will vary depending on a few factors such as the size of your loan and whether you are a first home buyer. Generally, the amount of LMI for a first home buyer will be higher since they are perceived as a higher risk.
As an example, if you were a first home buyer purchasing a $600,000 property over a 30-year term with a 5% deposit, your LMI premiums could be in the vicinity of $23,900 according to savings.com.au. For more information or to calculate your expected LMI premiums, visit the Lenders Mortgage Insurance Calculator.
How to avoid paying LMI
You can reduce or even avoid paying LMI by saving a larger deposit prior to purchasing your home. In some cases, you may also be able to use a parental guarantor to cover part or all of your home deposit if your parents have equity in their home. First home buyers who are eligible for the First Home Owner Grant (FHOG) may also be able to use their grant to reduce or offset their LMI. Simply refer to the First Home Owner Grant Website to find out more about the grants available in your state.
For more information about LMI or FHOG, speak to one of our Home Loan Specialists today on 1800 538 287.
Should you keep saving for a home or buy now and pay LMI?
There’s a strong argument that first home buyers could be better off going in with a smaller deposit, paying the LMI premium and enjoying the many benefits of homeownership sooner including not having to rent.
However, the right answer to this question will differ for each person, so it is best to seek financial advice to help decide which option is right for you and your circumstances.
Whether you’re ready to purchase your dream home right away or simply have some questions, our friendly and knowledgeable Home Finance Specialists are here to help you. Simply give us a call today on 1800 538 287 for an obligation-free chat.
