When it comes to applying for a home loan there is a lot of information that comes hand-in-hand with the application process.
From fees and charges, to regulations and obligations, the information that a lender provides can be both overwhelming and exciting for future homeowners.
Some of the information that you will receive will be in relation to Lenders Mortgage Insurance (LMI)- a once off insurance that is paid on top of the amount that you borrow from a lender.
It’s an additional cost that is paid only by those who cannot pay the minimum deposit amount required by a lender.
When buying a property, it’s important to understand exactly what LMI is, how it works and how it may impact your application and chances of moving into your own home.
Here’s what you need to know:
What is LMI?
LMI is short for ‘Lenders’ Mortgage Insurance’, and is an insurance that you pay which protects your lender if you were to default on your mortgage repayments.
To put it simply, it is a safety net for lenders so that they are confident that they will receive their money back, especially when a secured property decreases in value or doesn’t repay the full amount outstanding when sold.
Although it is an additional expense, it is often seen as a positive and productive way to get into your home sooner, rather than later. (Especially when you have a smaller deposit).
How does it work?
Usually, you will have to pay LMI on your home loan if you are borrowing more than 80% of the property value on a standard loan, or more than 60% of the property value on a low doc loan.
You have the option to either pay the LMI costs as a one-off lump sum at the establishment of your loan, or alternatively you can have the costs added to the principal of the loan, which you will repay over time.
LMI takes a lot of risk out of lending money, and enables a lender to provide their service to a wider range of people. This is done through the application for insurance.
Quite often, it is not your lender who provides the insurance, but a third party that your lender has specifically chosen.
Who needs LMI?
If you are borrowing more than 80% of the property value on a standard loan, most lenders require you to pay LMI costs. This means that it is likely you will need to pay LMI if you have less than a 20% deposit.
This is something that you can discuss with your lender, and is an extremely personal decision that varies depending on your financial situation, housing availability, and other unique and mitigating factors.
How much does it cost?
There is no straight answer as to how much LMI will cost you. This is because it depends on a variety of different situations and circumstances.
Some of the factors that are taken into account when calculating LMI include:
The size of your deposit – The size of your deposit is usually the starting point in determining whether or not you will be required to pay LMI.
The value of the property- The value of the purchase property is taken into account when determining exactly how much LMI you are required to pay for.
The size of the loan- Basically, the higher the loan, the higher the LMI costs.
The type of loan you are applying for- The purpose of your loan can impact your LMI costs. This includes whether the loan is for investment purposes, or will go towards a home that will be owner occupied.
Your lender’s chosen insurer- Your lender will chose the insurer that provides LMI. This means that costs can vary depending on the insurer chosen.
While LMI is an additional expense to what can already be quite a costly process, it is a great tool to utilise if you would like to get into your home (or secure your investment property) just that little bit faster.