So you’re in the process of buying a house. You’ve likely heard the term LMI dropped into conversation by lenders a few times now, but what is LMI, otherwise known as Lenders’ Mortgage Insurance?
We’re here to break down banking jargon and help you feel more confident in taking out a home loan.
Lenders’ Mortgage Insurance (LMI) is a one-off insurance premium that is added to your home loan to protect the lender against the loss if you’re unable to meet your repayments and needed to sell your home.
When your home is sold and it’s sold for less than the loan balance, LMI will cover the lender for the difference. If this happens to you, it’s important to know that you’ll still be liable for the remaining balance you were unable to pay. This balance will be owed to the company that provided the LMI.
LMI is non-refundable and non-transferable and is usually required when you are borrowing 80% or more than the purchase price. LMI helps protect the lender and opens up the options for homebuyers who otherwise would be able to financially afford to pay a loan but just may not have the desired deposit of 20%.
LMI is calculated based on your LVR and loan amount. That means, the more you save for a deposit, the less LMI you’ll pay because you’ll borrow less.
For example, if you wanted to buy a house that’s worth $600,000, you would typically be required to have a deposit of $120,000 (20% of the property's value).
Let’s say you’ve only been able to save $90,000. This means you’ll need to borrow 85% of the purchase price from a lender and you’ll usually need to pay LMI.
To find out how much LMI you might pay, it’s worth chatting to a Lending Specialist to give you a rough estimated cost as it will depend on your LVR and some other factors.
Whether or not you should try to save for longer to avoid paying LMI is really up to you. Some people are able to hold off and wait longer to save a bigger deposit, whereas some may want to take advantage of house prices at that point in time.
There’s no right or wrong answer and having to pay an LMI premium is not always a bad thing depending on what your goal is (maybe you want to own a home sooner rather than later).
As always, our friendly team of experts are here to help guide you through the home buying process.
Our friendly team are here to help you through the home loan process and choose the right loan for you.