Lenders mortgage insurance (LMI) is needed when the loan value exceeds 80% of the purchase price of a property, or property valuation if refinancing. A lender deems a loan to be riskier if the Loan to Value Ratio (LVR) is greater than 80%, in which case LMI is charged.
LMI, which is different to mortgage protection insurance, protects the lender’s risk in a residential mortgage transaction if the borrower defaults on loan payments. LMI is a common practice in the industry, especially for first-time homebuyers who may find it difficult to accumulate a 20% down payment.
Even while the actual property serves as security for the mortgage, there is a danger that its value may decrease due to the nature of the real estate market like any other investment. If the borrower is unable to pay back the loan and the property is sold for less than the loan’s worth, the lender may suffer a financial loss.
The size of the loan and the value of the property are two variables that affect how much the LMI premium will cost. The majority of insurers are accommodating when it comes to the LMI payment method; it may either be a one-time upfront premium payment or a premium that is incorporated into the loan’s overall cost and is paid as part of the regular repayments. It is not transferable, thus depending on how much equity the borrower has in the property, a new loan, such as one obtained through a refinance, may call for a new LMI premium.
What’s in it for me?
Although LMI safeguards the interests of the lender, borrowers benefit from paying the LMI premium. By choosing LMI, a borrower can buy a home independently and earlier than they might otherwise be able to. The use of a guarantor or needing to put up a 20% deposit, both of which are sometimes not feasible for many first-time homebuyers, are alternatives to LMI.
A borrower must make a deposit equal to at least 20% of the loan amount they want to avoid being labelled as “high-risk.” Since many buyers find it challenging to save this much money, LMI enables borrowers with lesser down payments to enter the market more quickly. The main advantage of LMI is that it may help many first-time homebuyers realise their dream of homeownership.
How can I avoid paying LMI?
Depending on your situation, you might be able to save enough for a larger down payment. A larger down payment results in a smaller loan balance and, thus, a lower LVR, which lowers the lender’s risk. To avoid paying LMI, you must borrow no more than 80% of the value of the property.
You do have the choice of finding a guarantor for your loan if you don’t have the resources to make a 20% deposit and want to avoid LMI. A close family who uses the equity in their home to assist you secure yours and keep your total loan equal to or below 80% may be qualified to serve as a guarantor, such as a parent, sibling, or maybe a grandparent. It’s crucial to keep in mind that serving as a guarantor has certain risks as well.
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