Nobody means to default on their home loan repayments. But sometimes life slings a curveball and the borrower loses a job, becomes sick or can’t meet their financial obligations for one reason or another.
And that’s why there’s lender's mortgage insurance. (LMI)
Now before we delve a little deeper into the mysteries of LMI, we should first take a moment to clear up an area of confusion.
LENDERS MORTGAGE INSURANCE IS NOT THE SAME AS MORTGAGE PROTECTION INSURANCE.
Sorry to be dramatic and put it in uppercase bold, but it is important to understand the difference between the two.
Lenders mortgage insurance exists to protect the lender, not the borrower.
If the borrower, for whatever reason is unable to meet their home loan repayments, then the lender can claim on the LMI policy to make up the difference.
By significantly defraying the risk, LMI encourages banks and financial institutions to lend larger amounts and approve more loan applications.
Mortgage protection insurance, on the other hand, exists to protect the borrower from some of the risks. That could render them unable to pay back their home loan. This includes cheery stuff like involuntary job loss, injury or illness, and death. Hopefully you will never need it, but that’s what it’s for.
IF LMI ISN’T FOR ME, THEN WHY DO I NEED IT?
That’s a good question.
Well, the short answer is that LMI can actually help you buy a home.
Let’s say you’re in the market for a property, but don’t have enough capital to lay down a substantial deposit. (Usually in the region of 20%)
This can make things extremely tricky, because lenders being lenders, they won’t generally take you on without a deposit.
That is, unless you have LMI!
Lenders usually require LMI if the difference between the loan amount and the current market value of the property is higher than 80%. (This is known as the loan to value ratio.)
LMI mitigates the potential risk to the lender if you are unable to make loan repayments. And this gives them both the literal and metaphorical security to offer you a loan even without the normal deposit.
WHO PAYS FOR LMI?
You, to put it bluntly. Either upfront or by adding it to your home loan. If you opt for the latter, then you will be charged interest on your LMI along with the rest of your loan.
Having said that, LMI can differ in costs according to the LVR. So, in effect, the more deposit you have, the less you pay in LMI.
Here are some of the other criteria that may preclude you from having to pay LMI.
- If you are a medical doctor, lawyer, accountant, mining specialist, professional athlete, or entertainer with a maximum of 90% property value.
- If you have a guarantor owning a property in Australia who is related to you.
- If you are a first-time home buyer. *
* For first home buyers LMI is waived when you are deemed eligible for a First Home Loan Deposit Scheme. This is part of the nationwide assistance program designed to stimulate first time buyers even if they only have a 5% deposit.
SO, WHAT’S THE VERDICT ON LMI?
Like most things in life, there are pros and cons. LMI can be a great way to get you into a new home when you don’t have the necessary capital for a deposit or for when a lender won’t back you.
But...
It can also end up adding a significant chunk of change to your loan repayments over time.
So, before you make a decision, it’s best to talk to an experienced broker. They will give you all the details and help you make the best decision
Like to know more about LMI and your options? Then contact our team at Contour Finance and we’ll gladly show you the best way to move into a new house, without moving into added debt.
