Understanding Lenders Mortgage Insurance (LMI)
Getting into the property market is becoming more challenging for first home buyers. It can take years of diligent budgeting and cutting corners to save up a deposit to afford a median-priced house in a place like Sydney. While you’re saving up a deposit, house prices continue to rise, and it can seem like there’s no way to catch up and you could be missing out.
That’s often the dilemma first home buyers face. Should you wait and save the 20% deposit or make your move with a smaller deposit the minute you find the house of your dreams?
The good news is that it’s possible to get into the property market sooner than later and borrow up to 95% of the property value by paying the Lenders Mortgage Insurance (LMI).
What is LMI and when do you have to pay it?
Usually, banks and lenders will require that you have at least 20% of the property purchase price to take a home loan. Otherwise, you will have to pay what’s called the Lenders Mortgage Insurance (LMI) if you borrow more than 80% of the house price.
What does mortgage insurance cost?
This insurance protects the lender specifically in case you default on your loan and are unable to meet your repayments. Depending on your circumstances, your lender can arrange the insurance and help calculate how much you will have to pay based on the size of your deposit and the price of the house you’re buying.
Is LMI added to the loan?
While it is possible to save on LMI by saving a more significant deposit, the benefit of LMI is that it allows you to buy a property with a smaller deposit. You can pay this one-off cost upfront on settlement of the loan, or it can be added to your loan amount so that you pay it off over the life of your loan.
As your property increases in value over time, it could make up for the cost of LMI. Over time you could also unlock the equity in your home to refinance and avoid paying LMI.
At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.
But don’t worry, we can help with that.
If you’re thinking of buying a home, you can contact us for advice about the best options for you when it comes to your mortgage. We can also tell you about alternative ways of getting into the market with a smaller deposit, like guarantor and family pledge loans. You can also use our calculators to find what’s the best loan for you.