Lenders mortgage insurance, also known as LMI, is an insurance premium paid by the borrower that protects the lender against the risks of the borrower defaulting, and the lender doesn’t regain all its money. Doesn’t sound exactly fair, right? The premium for LMI is charged as a one-off premium at the start of the loan and it’s paid by you – the borrower, even though it protects the lender. LMI shouldn’t be confused with mortgage protection insurance, which is about protecting the borrower against the risks when they couldn’t make loan repayments.
When does the lenders mortgage insurance apply?
Typically, banks are prepared to lend as much as 80% of the value of the property and they don’t want to lend more because of the risk of losing money if they have to reclaim the property and the market has moved unfavourably. But, lenders are prepared to lend you as much as 95% of the property value if they could pass the risk on to an insurer.
It’s great news for homebuyers, because that means they no longer need 20% of the property value to be able to buy a home. They could buy a home with a smaller deposit. Lenders will arrange LMI for you as part of the loan approval process. So, there’s no additional paperwork involved.
How is the lenders mortgage insurance calculated?
The LMI premium depends on two variables. The first one is the loan amount, and the second one is the percentage that the loan makes up of the total property price. If you bought a house for $300,000 and borrowed $250,000, you would be borrowing 83% of the purchase price, and the lenders mortgage insurance premium would be approximately $1,750. But if you bought a house for $700,000 and borrowed $650,000 then you’ll be borrowing 93% of the purchase price and the premium would go up to approximately $25,500. These two scenarios showed a massive difference, and no one enjoys incurring costs that really wouldn’t give them any substantial benefits.
So, the question’s got to be – how to minimize or avoid lenders mortgage insurance? You could minimize lenders mortgage insurance just by understanding one key thing. Lenders mortgage insurance premiums vary from lender to lender. The difference between the cheapest and the most expensive can be several thousand dollars. When you look at loans, you now know that you need to ask them like what the LMI premium should it going to be to be able to factor them in comparison.
As for avoiding the lenders mortgage insurance, there are two ways in which you can do that. The first way is to save 20% of the purchase price. Your second option is to have family members as guarantors for the loan, that means they would put up one of their properties as a security for your loan. In that way, you would get the loan amount under 80% of the total value of the securities.
There are certainly legitimate reasons to borrow a high proportion of the value of the property you give the bank as security. However, it does come with additional risks. If rates go up or if your circumstances change, it may be difficult to make your repayments, and it’s possible you could owe and will need to repay more than the value of the property.
Make sure you’re clear about what you’re agreeing to, and if in doubt, ask the question!
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