Lenders Mortgage Insurance or LMI has helped over 2 million Australians get into their dream home sooner. Taking out loan with LMI enables a borrower to buy a new home without a large deposit.
With house prices constantly rising it is becoming increasing difficult to save a deposit. Without Lenders Mortgage Insurance lenders require a minimum 20% deposit, however you can now reduce your deposit to as little as5% with Mortgage Insurance.
Whilst the insurance premiums may appear costly, you need to out way the benefits. By gaining a foothold in the market, you can cover yourself against rising market values by buying at todays prices.
The good news is that many lenders now capitalise LMI premiums. This means that you don't have to find the cash to pay the premium. The cost of the insurance is simply added to the amount that you borrow.
How Does Lenders Insurance Work?
LMI protects the lendershould youdefault on your home loan. If the property is sold under mortgagee action and the outstanding loan balance is greater than the sale price,the lender would normally incur a loss.
In thissituation the Mortgage Insurerwill cover the lender for any shortfall. This giveshome loan lenders the confidence to lend to borrowersagainst asmaller deposit.
You can either pay the premium upfront, or talk to your Mortgage Broker about a lender who will capitalise (add) the premium to the amount that you borrow.
Can Lenders Mortgage Insurance be avoided?
If you can qualify for a Keystart Home Loan you will not be required to pay LMI which can save you thousands of dollars
Some lenders do not requireMortgage Insuranceand charge a "Risk Fee" instead. The amount of the Risk Fee depends on the amount of the loan and the equity that you will have in the property.
You can avoidLenders Mortgage Insuranceby having a family member go guarantor on your behalf. They simply provide a guarantee for 20% of the purchase price. The family guarantee needs to be secured by either a first or second mortgage over another property.
Your lender will also need to comfortable that the guarantor is not put under any pressure to give the guarantee, and that he or she understands their obligations.