If you need a home loan of 80% or more of the value of the property you would like to buy, then you’ll probably need to pay what’s known as Lender’s Mortgage Insurance (LMI).
Essentially, LMI protects the lender if something unfortunately came along that might cause you to default on your home loan, as this may mean the lender is forced to sell the property. And, if it happens to sell at a loss, the lender can make a claim against the mortgagee for any shortfall.
The main advantage of Lender’s Mortgage Insurance
If you simply can’t save the required 20% deposit, you will still be able to purchase the property you have your eye on, but you will also have to budget for lender’s mortgage insurance to make the deal possible.
It means you can buy the property much earlier (rather than waiting until you had saved the full 20% deposit) or, if you look at it another way, you might be able to buy a better place than otherwise might have been possible.
In other words, you can take advantage of a great deal while it’s still on the market. At a price.
What costs will it add to your home loan?
Before you get too excited, it’s important to realise that LMI can be quite expensive: Let’s say you were borrowing 95% on your mortgage, based on a home worth $400,000, then you will end up with a premium of $14,000 – not cheap.
If you had 90%, then the premium would drop significantly, to around $ 7000, based on figures supplied by QBE LMI, one of the largest providers in Australia.
So, a lot depends on exactly how much deposit you have available.
GST is payable on all LMI premiums and is usually included in the quoted cost by the lender. On top of this, you will have to pay Stamp Duty, depending on local state and government rules.
What else do you need to know?
Lender’s mortgage insurance is a one-off fee and, usually, you will be able to capitalise your LMI premium by adding it into your home loan amount and then pay it off as part of your monthly repayments.
You should also be aware that LMI is not transferable to another loan, so if you choose to re-finance, or re-negotiate into an alternative loan at some point, you will have to pay LMI once more if you need to borrow 80% or more of the total amount.
Finally, it’s important to understand that LMI isn’t the same as mortgage protection insurance. This is required to ensure your loan repayments are still covered in the event of you not being able maintain them, due to events such as injury or job loss.
Lender’s mortgage insurance increases the number of people they are able to lend to, by decreasing some of the risk of lending the money.
For buyers, it allows them to have more flexibility to obtain a home loan to buy a property before they have the 20% deposit available, a useful option to be aware of in the highly competitive property market.