In most cases, a deposit is required when you are buying a property or borrowing money to buy a property. Mortgage brokers prefer a cash deposit of 20% of the property price. The deposit is an assurance to them that the borrower will be diligent in making repayments. This makes the loan a low risk for the mortgage brokers.
However, there will be situations where the borrower has a good credit history and stable income but just doesn’t have enough money for a deposit. A loan with a deposit lower than the 20% standard is risky for lenders but they may still see you as a potential borrower if you have a good financial history. In this case, borrowers may be asked to buy insurance called lenders mortgage insurance.
So, what is lenders mortgage insurance?
Lenders Mortgage Insurance or LMI is commonly heard by people looking to buy a house or those thinking of getting a home loan. If you are buying a property and don’t have enough money for a deposit, you’ll be asked to pay for lenders mortgage insurance. For some, this could be a good option as you get the property sooner, but it might also cost you more with the LMI being capitalised on to the loan and the interest increases during the time of your loan.
LMI is a condition of the home loan contract that mortgage brokers require the borrower to pay. Generally, this is required if you borrow more than 80% of the value of the property that you want to buy.
This insurance protects the lender and not the borrower. It covers the borrower’s mortgage in case there will be default on the loan repayments. The general purpose of the LMI is to cover any loss by the lender in case they will not recover the outstanding balance of the loan.
The amount of LMI is dependent on various factors such as the amount borrowed, the value of the property, your employment, who are your lenders, and the amount of your deposit. The bigger your deposit is, the smaller your lenders mortgage insurance is.
Also, be reminded that lenders mortgage insurance (LMI) is different from mortgage protection insurance (MPI). LMI protects the lender in possible loss in case of default in loan, while MPI protects the borrower and their home if you are unable to make the repayments, like situations of job loss, injuries, or unexpected calamities.
How can lenders mortgage insurance benefit you?
With LMI, you can have an opportunity to own a house even with a small amount of deposit. You do not have to wait for a few more years while you complete the amount for the deposit. You can save for your building equity than paying your weekly rental. This also gives a push for mortgage brokers to offer a home loan to borrowers even if they haven’t reached the 20% deposit requirement.
The benefits of LMI will still be dependent on your current situation. Here are some things to ponder upon before deciding to get an LMI:
- How much LMI can you pay – think carefully and decide on how much lender mortgage insurance you are willing to shell out. This will be based on the amount of your deposit and your financial and personal goals.
- Check different lenders’ charges – start looking for how much various mortgage brokers charge and what your rates will be like.
- Get a partner – open up to someone you can trust before making big decisions. It can be your family members or experts in the field that can help you decide.
Talk to our professional mortgage broker and get more information about getting a home loan. DDDC Finance is a team of knowledgeable experts that can help you in getting your dream home or investment sooner than you think.
Are there ways to avoid or minimise lenders mortgage insurance?
There are ways in which you can lessen the amount of LMI or even avoid paying this when you apply for a home loan.
- Save for the 20% deposit
This is the simplest and the most direct way to avoid LMI. And even if you haven’t reached the 20%, the closer you are to it, the lower the cost of your LMI. - Get a family guarantee
Another way to avoid LMI is to ask a family member to guarantee part of your loan. They can usually use their home as an additional safety net for your loan. Just take note that this means they are liable for the loan in case of default and they’re only covering a portion of your loan, not the full amount. Any default on your loan can affect their loan capacity in the future so make sure you explain this to them properly.
You can ask for your guarantor to be released in the future when you have already paid the loan amount under guarantee. - Waivers for some professions
Some lenders offer to waive the lenders mortgage insurance for some professions that they see as low-risk for losing jobs such as doctors or dentists. The list of qualified professions differs from lender to lender, and some mortgage brokers don’t offer LMI waivers at all. - Government’s loan deposit schemes
Some first-home buyers and single parents may take advantage of some government’s schemes that can help them in getting their house but with a small amount of deposit or without the need for LMI. However, there are limited places available and some restrictions with income so it’s better to speak with your trusted adviser to find out your qualifications.
Deciding to have your very own home is a huge step and may need time to think about. Lender mortgage insurance may not be for everyone but it can help you in starting your journey towards getting the property you dream of.
Every one of us has different circumstances and it’s still up to you to decide if you’ll take the leap and find out if you’re ready for the next level in your life.
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Sources:
[1] Dowling, S. (2021, July 6). Lenders mortgage insurance (LMI). Smartline.
[2] Farrelly, K. (2021, March 16). What is lenders mortgage insurance, and is it really that bad. Domain.
[3] Shore Financial. (2020, September 15). LMI Explained: Everything You Need to Know About Lenders Mortgage Insurance.