If you’re looking to buy your first home, you may want to start compiling your own guide to banking and real estate jargon. One key phrase to add: LMI. Find out what lenders mortgage insurance is and why you may need to pay it.
You’ve started saving for your first home deposit, and you’re finally ready to head to the bank to see if your finances are on track. You’re thinking of dropping a cool $500,000 on a house, but with only $30,000 you discover you’re not quite where you want to be.
Your loan is certainly within reach, but the bank is talking about charging you a fee called ‘LMI’ to help you reach your financial goals sooner.
So, what on earth is LMI?! How much is it exactly? And why do I have to pay it?
Never fear, we’re here to demystify the jargon and explain everything you need to know about LMI.
What is LMI?
LMI is an acronym for Lenders Mortgage Insurance.
Basically, lenders mortgage insurance is a one-off payment that may be required by your lending institution to pay for cover that insures them in the event you are unable to repay your loan.
With LMI, lenders may let you borrow with a smaller deposit. When that 20% deposit is taking a long time to save, for many Australians, LMI can act as something of a ticket to home ownership. So, the option is certainly there to add LMI to your home loan (many people do this), however in doing so just be prepared that you’ll also need to pay interest on that amount for the lifetime of the loan.
Who has to pay LMI?
Not everyone has to pay LMI. It’s typically only required of people with a home deposit of less than 20% of the home’s full purchase price.
If you have more than that saved, you likely won’t be charged LMI.
Why do I have to pay LMI?
“Lenders mortgage insurance is there to protect the lender in case you default on your loan repayments, and the sale proceeds from your home are not enough to cover the outstanding amount you owe,” ING Mortgages manager William Kiln explains.
The amount you have saved will affect the amount you need to borrow. So, if you have 20% deposit already saved, the bank will only need to lend you the remaining 80% of your purchase amount, as opposed to 90% or more.
Therefore, the more they lend you, the more they will want to feel secure that they’re going to get their money back. Hence, the need to insure themselves (or you to insure them) against any potential losses.
Do I really have to pay LMI?
If you don’t have the required deposit amount, yes. However, if you have more than the 20%, then it’s unlikely you will be asked to pay LMI.
There is another way around it: using a guarantor.
As Kiln explains, this voids the necessity of the bank to insure themselves against your defaulting on your repayments. “If someone goes guarantor for you, it means they pledge their own assets if you default on your loan,” he says.
How much is LMI?
The amount of LMI varies depending on the size of the loan, size of your deposit, and value of the property, and is calculated at the discretion of your lender and their insurance company.
“It’s calculated as a percentage of the loan amount and will vary on your loan to value ratio,” Kiln confirms. “This means the bigger deposit you put down, the less lenders mortgage insurance you’ll pay.”
To give you a ballpark, it could be in the tens of thousands of dollars.
What does it mean for me?
It basically means you will need to evaluate your budget and finances accordingly. If you do need to pay this fee and choose to pay it upfront, it may cut into the amount you’ve already saved.
Will I get my LMI amount back?
Unfortunately, not. Even if you make all your repayments and don’t default on the loan, LMI is a non-refundable payment.
In saying that, LMI can help you on your way to becoming a homeowner a heck of a lot sooner, and at a time that’s both good for you and the property market.
Source: prepared by realestate.com.au in partnership with ING.