Buying a house is an exciting venture, but it comes with financial complexities. One such aspect that often puzzles prospective homeowners is Lenders Mortgage Insurance (LMI). In this blog post, we’ll take a deep dive into what LMI is, why it’s needed, its benefits, and the potential downsides.
What is Lenders Mortgage Insurance (LMI)?
LMI is a single insurance fee paid by the borrower but is designed to protect the lending institution if the borrower defaults on the loan. While this fee doesn’t impact your interest rate, it can influence your home loan repayments. LMI can be capitalized, allowing you to spread the cost over the life of the loan instead of paying it all at once.
Why is LMI Required?
Banks and other lenders often require LMI for loans they perceive as risky. This could be due to:
- Borrowing a high percentage of the property’s value
- A low deposit, typically less than 20%
- For self-employed individuals taking out a low-doc loan when borrowing over 60-70% of the property value
The premium for LMI may vary based on factors like the loan amount and property value.
The Advantages of LMI
LMI offers some tangible benefits for borrowers, including:
- Increasing Accessibility: It can enable you to enter the property market sooner with a smaller deposit.
- Growing Equity: If property values rise, your home equity may grow within a year, covering the LMI cost.
Potential Drawbacks of LMI
However, LMI is not without its drawbacks:
- High Cost: LMI can be quite expensive, impacting your return on investment.
- Refinancing Issues: It can restrict refinancing if you’d need to pay the fee again and your loan-to-value ratio (LVR) stays over 80%.
Refinancing and LMI
When you refinance with another bank, and your LVR is more than 80%, you’ll have to pay LMI again. For instance, refinancing a $600,000 home with a $500,000 debt would mean an 83.33% LVR, triggering LMI.
Why LMI Costs So Much?
The substantial cost of LMI is determined by several factors such as:
- Loan amount
- Home equity level
- Whether you’re a first-time buyer or investor
- The risk linked to the loan package
- The lending institution
A professional financial advisor or real estate broker can guide you to make the best decision regarding LMI.
LMI Refund and Transfer
Unfortunately, LMI refunds are rare, mostly limited to changes in bank agreements prior to 2012. Transferring an LMI policy to another bank is also not an option, although staying with the same lender may provide discounts on new premiums.
Your Next Steps in Home Buying
Home buying, especially for the first time, can be daunting. Navigating property searches, inspections, auctions, and financial burdens requires patience and understanding. Knowing about LMI, its intricacies, and how to manage it, can save you money and stress.
Low-interest rates may make saving for a 20% deposit challenging, but with the right guidance and knowledge about LMI, your dream home could be closer than you think.
Talk to our team of experts about your personal financial situation, and we’ll help you find the best way to make home loan repayments timely and possibly even have LMI waived for your mortgage!