The property market can be a tricky area to get into, especially when you need to save for a large deposit.
In this article, we take a closer look at Lender’s Mortgage Insurance; discussing what it is and if you can avoid paying it.
What is Lender’s Mortgage Insurance?
Lender’s Mortgage Insurance (or LMI), is an insurance premium applied to your mortgage if you have less than a 20% deposit to contribute.
Borrowing more than 80% of the value of a property from the bank is considered a risk, so the LMI is applied to your mortgage to protect the lender against any potential loss they may incur if you are unable to make your mortgage repayments. The amount is calculated as a percentage of your mortgage value and is paid as a lump sum at the beginning of taking out a mortgage, or added to the principal of your loan.
How is it calculated?
Depending on how much you have saved for a deposit, your mortgage broker or chosen bank will determine what your Loan to Value Ratio is (also known as LVR). Your LVR is worked out by taking the amount of money you intend to borrow and dividing it by the value of your property.
The LMI premium is a percentage that is then worked out based on the LVR amount. For example, if you have a 5% deposit, you’ll need to borrow 95% of the value of your property, making it a very high risk for the bank to the loan the money to you. For that reason, you’ll be charged a higher percentage of LMI than you would if you had a 15% deposit, for example.
Do I have to pay Lender’s Mortgage Insurance?
If your loan amount is more than 80% of the value of your property, or you are unable to provide adequate proof of your financial situation, income and employment history, you will need to pay Lender’s Mortgage Insurance (LMI) or have a guarantor ready to secure the loan.
Another factor to consider is the way you choose to pay the LMI premium. Choosing to apply the Lender’s Mortgage Insurance to your home loan annually means it will attract interest fees so if you’re not in a rush to buy, it may be wise to calculate the long-term costs of this fee and weigh up if it will be cheaper for you to hold off on making the purchase while you save for a larger deposit.
Genworth has a useful LMI Premium Calculator to help you work out your Lender’s Mortgage Insurance, if you require it. However, as every situation is unique, it’s important to do some thorough research and speak to a financial expert to assess your individual circumstances.