Should Lenders Mortgage Insurance (LMI) be seen as an additional hurdle to enter the market or as an opportunity to enter the market sooner?
First things first, lets outline exactly what LMI is. This is an insurance policy taken out by the banks that protects them should you be unable to repay your loan. If you are trying to borrow more than 80% of the value of the property, LMI will be needed. It is a once off expense that is paid for at settlement of your property. It is paid by you, the purchaser, and traditionally funded by adding the cost of the policy to your total loan amount. However… just because it is an additional cost to your purchase, doesn’t necessarily mean that it is a negative.
LMI can help you enter the market earlier through allowing you to borrow a higher percentage of a property’s value. Taking time to save the additional cash to reach 20% deposit plus costs may mean that the property market has grown faster than you’re able to borrow. This has been a never ending cycle for many over the last 7 years of strong property growth in Melbourne and Sydney.
For first home buyers, particularly those struggling to save a deposit but more than comfortable to meet their mortgage repayments, it can be a key tool to break free of the rental trap.
It is important to be aware that LMI only covers the lender if you default on your loan payments and the lender is unable to secure the full outstanding debt still owing, when they sell your property. LMI does not provide you with any cover.
The bigger the percentage of the property’s purchase price you have to borrow, the greater the amount you’re likely to pay on insurance. So if your deposit is less than 20 per cent of the value of the property you will need to factor LMI into your home loan. In some cases, lenders may require LMI even if you have a lower deposit, depending on the type and style of property you’re purchasing – for example, some inner-city apartments or rural land.
All Brokers have access to lenders LMI fee calculators and can provide you with an estimate of what the additional cost will be. There are really only 2 companies that the banks work with to provide the insurance – QBE and Genworth. Some banks get cheaper policies due to the volume of policies they take out with their preferred insurer.