Navigating buying your first home can be tricky, especially with confusing concepts like Lender’s Mortgage Insurance (LMI) being a part of the process that no one warned you about.
Often, if you get your pre-approval or finance from a bank, they’ll wave off the LMI added to your pre-approval with a line about how it’s standard practice for first-home buyers and nothing to worry about – without actually explaining to you what it is.
While LMI is prevalent for first-home buyers, it’s still important that you know exactly what’s included in your pre-approval or approval, and what you’ll be paying for.
What is LMI?
LMI covers your lender – generally, the bank – if you default on your loan.
Basically, the LMI cost is paid by the bank that finances your loan to an insurance company, to protect the bank if you (the borrower) can’t pay off your home loan.
This cost isn’t covered by the bank, it’s covered by you.
Lender’s Mortgage Insurance (LMI) is usually a one-off payment made by you at the time of the loan settlement and is non-refundable and non-transferrable.
This insurance will cover the bank if you default on your loan, unfortunately, it will not cover you.
How much does Lender’s Mortgage Insurance cost?
The cost of Lender’s Mortgage Insurance will vary.
Usually, the cost is dependent on a variety of factors, which can include:
- The amount of money you are borrowing
- The value of the property
- Your deposit amount
- Whether you are buying as an owner-occupier or investor
- Your employment
- Your lender
Luckily, Arch Brokerage is here to help. We can talk you through the above to determine what your LMI cost will be, and unlike Lender’s Mortgage Insurance, we’re available for no extra cost to you!
Do I have to pay Lender’s Mortgage Insurance?
Generally, you may have to pay Lender’s Mortgage Insurance if you are borrowing more than 80% of the total value of your property, and don’t have a credible guarantor.
In other words, you’ll generally be required to pay it if your deposit is less than 20% and you don’t have an established guarantor.
However, it’s important to know that for first home buyers there are schemes available from the government with certain lenders that will eliminate the LMI costs. There are also lenders out there that can allow you to borrow up to 85% with no LMI costs, and depending on your occupation, you could be eligible to borrow up to 90% with LMI waived.
Different lenders may have different loan-to-value ratios (LVRs) so it is always worth talking to a broker to see your options.
The benefits of Lender’s Mortgage Insurance.
The primary benefit of paying Lender’s Mortgage Insurance is that it will help you get into the housing market faster.
As many of us know, saving a 20% deposit while paying rent and other bills can seem impossible – and for some, may be entirely unfeasible.
In these cases, LMI can provide first homebuyers with the opportunity to buy a house that they might not have otherwise!
In other cases, you might simply be interested in getting into the property market as soon as possible (we’ve all seen the dramatically rising prices in Brisbane, Gold Coast, Australia, and the world) and LMI can provide you with the opportunity to buy a home before you’ve had the time to save a 20% deposit – or to buy a more expensive home than one that you might buy otherwise.
For many, LMI is a way to escape paying rent and start gaining equity in a home.
Should I get Lender’s Mortgage Insurance?
Whether you should pay Lender’s Mortgage Insurance, get a guarantor, assess Government-or wait until you’ve saved a 20% deposit may depend on several considerations, including:
- How long will it take you to save to 20%?
- How is the property market looking in your current target location?
- Are you buying alone or as a couple?
- Do you have someone who is willing to act as a guarantor?
The Arch Brokerage can help you answer these questions and determine the best strategy for you to buy a home.
Talk to our team
If you need someone to help you navigate the world of LMI and how to answer the questions that influence it, Arch Brokerage is here to help you realise your dreams.
Knowing exactly what you’re getting into when you get a mortgage is critical – and may save you a lot of time, money, and stress well into the future.
It all starts with finding the right broker.
Get in contact with Arch Brokerage today for a zero-obligation chat and see if we’re a good fit for you.