Browsing property sites – at home or abroad – can be exciting. You may have already found your dream home (perhaps several!) and can’t wait to get started. However, buying a home is as big a financial challenge as it is an exhilarating milestone. Especially for first-time buyers.
Saving for a deposit, for example, can be a real uphill battle. However, the 20% deposit figure you see everywhere isn’t the only option. It’s actually possible to get loans with less than 20% if you know how.
Luckily, we do. Today, we’re going to be exploring the world of Lenders Mortgage Insurance, or ‘LMI’. What is LMI? How is it calculated? Can Lenders Mortgage Insurance be added to your loan? Is LMI even the right option for me?
We know there are a lot of questions. So sit back and browse our handy all-in-one guide. Let’s get started on everything you need to know about Lenders Mortgage Insurance.
What is Lenders Mortgage Insurance?
Okay, let’s begin with the basics. Lenders Mortgage Insurance (LMI) is a type of insurance designed to protect lenders, not borrowers, in case the borrower defaults on their loan. So if you’re buying a home in Australia and can’t meet the 20% deposit threshold, LMI may come to play.
Basically, it’s an additional cost that ensures lenders are protected from financial loss, making it possible for buyers to secure loans with smaller deposits.
How is Lenders Mortgage Insurance Calculated?
There’s no one-size-fits-all LMI figure. That said, there are general principles lenders use to calculate Lenders Mortgage Insurance. They’ll consider:
- Loan Amount: The higher the loan amount, the more expensive the LMI.
- Loan-to-Value Ratio (LVR): This is the percentage of the property’s value you intend to borrow. An LVR above 80% typically triggers the need for LMI.
- Property Value: LMI is calculated as a percentage of the loan amount, which depends on the property’s value.
Example time: if you’re purchasing a $600,000 property with a $60,000 deposit (10% of the purchase price), your LVR would be 90%. LMI in this case might range from $8,000 to $15,000. As always, it depends on the lender.
There’s a handy hack, though, for the less mathematically gifted out there: just use an online Lenders Mortgage Insurance calculator like this one. Input your loan amount, deposit size, and property value, and hey presto! There’s your LMI.
Can Lenders Mortgage Insurance Be Added to the Loan?
Yes, LMI can usually be added to your loan amount. This process is called capitalizing LMI. The major plus here is that it spreads the cost of LMI over the life of the loan, rather than requiring a hefty upfront payment.
The downside? Well, while capitalizing LMI reduces immediate financial strain, it will increase your overall loan balance and the amount of interest you pay over time.
Let’s say your LMI premium is $10,000 and you add it to a $500,000 loan. Your total loan becomes $510,000. Over a 30-year term, the additional interest could significantly increase how much you end up paying in interest. Take that into account.
How Can I Avoid Lenders Mortgage Insurance?
For many, LMI is a useful way to get started on the homeownership ladder sooner. But others may be wary of the long-term costs. So, if you’re interested in avoiding Lenders Mortgage Insurance, consider these strategies:
- Save a Larger Deposit: Of course, the simplest way to avoid needing LMI is to save for a 20% deposit.
- Look for LMI Exemptions: Some professions, such as doctors, accountants, and lawyers, may qualify for Lenders Mortgage Insurance exemptions. Check with your lender to see if your profession qualifies.
- Family Guarantee: Some lenders offer family guarantee schemes, where a family member uses their property as security to help you avoid LMI.
- First Home Buyer Schemes: First–time buyer in Australia? You’re in luck. Some programs, like the First Home Guarantee (FHBG) allow eligible buyers to purchase with a deposit as low as 5% without paying LMI.
How Do I Get Rid of Lender Paid Mortgage Insurance?
Lender-paid mortgage insurance (LPMI) is an alternative to borrower-paid LMI. It effectively means the lender pays the insurance premium upfront and incorporates the cost into your loan’s interest rate. Again, this will save you money in the short term, but shouldn’t be taken on lightly. Those interest costs will soon add up.
To effectively eliminate the impact of LPMI:
- Refinance Your Loan: If your property’s value has increased and your LVR is now below 80%, consider refinancing to a standard loan without LMI or LPMI. This could cut your interest rate and overall costs.
- Increase Equity: If possible, make extra repayments to reduce your loan balance and increase equity in your property. Once your LVR drops below 80%, you may be eligible to refinance without LMI.
Additional Tips for Managing LMI
For some prospective homeowners, LMI is a worthwhile option. But Lenders Mortgage Insurance is not to be undertaken lightly. You can hugely alter the effects of LMI by leveraging a few additional tips, such as:
- Use an LMI Calculator: A Lenders Mortgage Insurance calculator can help you understand your potential costs and plan – and budget – accordingly.
- Negotiate with Lenders: There’s no set LMI figure. Different lenders have different policies, so take the time to shop around and find the best deal. You don’t have to choose the first lender you speak to!
- Understand Waivers and Discounts: Some lenders offer lenders mortgage insurance waivers or discounts for specific circumstances (as mentioned earlier). Research your options thoroughly before signing up to LMI.
Lenders Mortgage Insurance in Australia: Key Takeaways
So what have we learned about Lenders Mortgage Insurance in Australia? Well, it certainly adds to the cost of buying a home in the long run, sure. Having said that, LMI is a great tool for opening up homeownership for those who might not otherwise qualify for a loan. Here’s a quick recap:
- LMI protects lenders, not borrowers.
- It’s typically required when your deposit is less than 20%.
- Use tools like a Lenders Mortgage Insurance calculator to estimate your costs.
- Consider exemptions, government schemes, or family guarantees to avoid LMI.
- If you’re already paying LMI or LPMI, explore refinancing or increasing equity to eliminate it over time.
Understanding the nuanced world of LMI can seriously help you on your journey towards homeownership in Australia.
Don’t forget, if you’re eyeing up your dream property, here in Australia or somewhere overseas, Upscore’s FinancePassport is here to help. Our service makes leveraging your finances and accessing quality mortgages abroad easier than ever before. Reach out to our expert team to research your options and get started today!
