Along with stamp duty, the single biggest expense in buying a property can be lenders mortgage insurance (LMI).
When purchasing a property, the lenders normally require the purchaser/borrower to have a deposit, (or equity in another property) totalling 20% of the purchase price and fees.
For example, on a $400,000 purchase the lender would require the purchaser/borrower to have an $80,000 deposit plus fees. That is, the loan amount in this instance would be $320,000.
There are very few 1st homebuyers who have managed to save a 20% deposit + fees.
All is not lost. In the example of a $400,000 purchase, if the lender can get a mortgage insurer to insure the home loan and the borrower pays the LMI premium, the required deposit can fall to as little as 2% plus fees, i.e. $8,000 plus fees. In this instance the loan amount would be $392,000.
Obviously if would be easier for the purchaser/borrower to come up with a 2% deposit as opposed to a 20% deposit.
When the purchaser/borrower has less than a 20% deposit and costs and wants to purchase a house they have to pay an LMI premium.
The lender is insuring your loan and you the borrower are paying the lenders insurance premium.
Many borrowers believe that the LMI premium protects them should they not be able to make their mortgage repayments due to sickness, accident, unemployment and the like.
This is not the case and borrowers need to be very clear on this.
The LMI policy protects the lender from loss and only the lender.
When a lender is presented with a home loan application with a 2% deposit, they assess it from a position of ‘worst case scenario’ and rightly so. 2% equity in the transaction does not leave much wriggle room.
When we say ‘worst case scenario’ when assessing a home loan application involving LMI, the lender assumes:
A combination of the above factors may see the lender realise less from the sale of the property than what is owed on the loan.
The lender makes a loss on that loan. In this instance the lender would claim the loss from the mortgage insurer and the mortgage insurer would cover the loss the lender made on that home loan.
The mortgage insurer would then chase the defaulting borrower for the loss. So, you the borrower pays the lender’s insurance premium to protect the lender from a loss on your loan.
And if there’s a loss the mortgage insurer will chase you for it! So, if you have less than a 20% deposit and fees you are more than likely going to pay LMI.
The LMI premium can run into thousands and thousands of dollars.
Generally, once you pay the LMI premium you will more than likely never pay it again. Bur you can be charged LMI again if you want to top your home loan in the future or if you want to refinance to another lender.
At Better Choice Mortgage Services, we have one and only one lender that does not charge LMI. The trade-off is that they charge a higher interest rate.
The other things to be aware of with LMI:
Your Better Choice Mortgage Broker can figure out whether you need to pay an LMI premium or not.
Contact Better Choice Mortgage Services anytime at betterchoice.net.au or email firstname.lastname@example.org or find us on Facebook.