Lenders Mortgage Insurance: What Is It and When Do You Pay For It?
Lenders Mortgage Insurance (or LMI) is one of the harsh realities of our generation. Along with deposits for properties worth ten times our income, LMI has become a rite of passage for anyone brave enough to leave their avocado-laden rental property and buy their first home.
Some people wrongly assume that Lenders Mortgage Insurance protects you, the borrower, in the event of default.
Dictionary alert: default means you’ve scoffed too many avocados and can’t make your monthly repayments on your home loan.
In fact, LMI protects the bank – as if they need protecting – in the event that you default. The reason it’s become such a commonality for our generation of first time buyers is because property prices have escalated faster than our wages. Which means we’re only able to scrape together 5-10% as a deposit, rather than the ideal 20%.
Being the TOP BROS that they are, banks decided to play ball with us, and offer loans at up to 95% of the property price (meaning you have a 5% deposit). In exchange, though, they want that little extra buffer of lenders mortgage insurance.
So, how much is it?
Soz to sound like your grade 4 maths teacher, but it’s a case of ‘how long is a piece of string?’
It depends on your loan-to-value ratio, and the value of the property you want to buy.
Dictionary alert: loan-to-value ratio is a percentage calculated by expressing the value of the property against the amount you need to borrow. So if a property is $200,000 and you’ve got $20k saved, your LVR is 90%.
Most people who borrow more than 80% of the property price (aka have less than a 20% deposit) have to pay LMI. It can be anything from around 0.4% - 5% (of the loan amount), and it’s paid in one go.
So when your property purchase settles, your solicitor will facilitate the withdrawal of the deposit plus the LMI figure.
That said, sometimes you’re able to capitalise the LMI figure into the loan, but of course, this increases your LVR percentage, and puts further stress on your borrowing capacity. Capitalising means calculating what your LMI is – let’s say it’s $5k – and adding that on to the amount you want to borrow. So the bank lends you the money you need to buy the home, as well as the money for the insurance.
It sounds like a total shit show, and it sort of is. But it’s really the only way to avoid having to wait until you have a 20% deposit, and it’s only a one-off fee. If you’re in a state that doesn’t charge first time buyers stamp duty, it’s one of the few major charges you have left to pay.
*information in this article is for illustrative purposes only. It is not intended to be taken as advice, and carries no weighting from an advisory perspective. Always discuss your personal circumstances with a qualified financial professional to ensure you’re getting tailored advice.