Lender’s Mortgage Insurance (also known as LMI), is associated with a loan that the lender consider to carry high risk.
When a loan is worth more than 80 percent of a property’s purchase price, a lender may need an insurance to hedge the higher risk. The one-off insurance payment will protect the lender in the event when the borrower can’t afford to keep up their home loan repayments.
In most of the LMI policies, a lender can make a claim if the borrower defaults on the loan. And the sale of the property doesn’t equal the value of the mortgage.
Remeber, the purpose of LMI is to protect the lender. Also, it allows the borrower to lend larger amounts. Ultimately opportunity for the lender to approve more home loan applications.
In borrower’s diary, adding LMI with a mortgage or home loan means additional expense.
So here are some of the factors that may affect the cost of LMI:
- The size of the loan amount – the bigger the loan amount, the more risk. Hence, the higher the cost of insuring against it.
- Your Deposit – Just opposite of the loan amount. The smaller the deposit you have, the higher the cost of LMI will be. The standard home loan products in the market will allow you to lend 80% of the property value. Which means you need to have 20% as deposit. In terms of low-doc, the deposit varies from lender to lender.
- Your Employment Status – The lender may perceive you as more risk in casual position compares to any permanent policy. So, it could also affect the LMI premiums.
- The LMI provider – The premiums can differ between the LMI providers. You could find several players in the market. Do a quick research before you sign in.
Now the question is it possible to avoid LMI. Certainly, possible!
So here are some tips to avoid paying LMI or at least to reduce :
Aim to save for a higher deposit: A simple solution to tackle LMI is to have a higher deposit.
For example, if you apply for a loan amount which is greater than 80 percent of the value of the property being mortgaged (LVR), then the risk of a lender not recouping their costs should the borrower default increase. LMI is a protection for the lenders in case the borrower fails to make repayments.
So the catch is to scale down the LVR. If you have a higher deposit, then the loan amount will be smaller, LVR will be less and may be the key to avoiding LMI.
Look for a guarantor: Certainly for many, even having the substantial deposit or at least 20 per cent deposit may be difficult especially when the prices of property climbing and climbing. So if you still want to avoid LMI, then a good solution is getting a guarantor on your loan.
A guarantor can help you to get a loan by offering additional security support. Usually, your immediate family members like a parent or spouse can be the guarantor. A guarantor can use the equity in their property to help you secure yours. This strategy is actually popular among the first home buyers.
But it is strongly recommended to seek independent legal and financial advice who ever is considering being a guarantor for a property loan.
Taking Advantage of Professional Benefits: It may vary from lender to lender but there is still some scope of taking advantage of your profession to avoid LMI. Some lenders consider professionals earning a minimum of $150,000 a year as ‘low risk’ borrowers due to perceived stability and high income and offer them special loan benefits. Majorly doctors are the bigger winners when it comes to waived LMI fees.
Do a research and compare: The cost of LMI varies between the providers. So, it would be smart if you do some research and compare beforehand. Get a quote for different financial institution before you begin the home loan process. It can potentially save you hundreds of dollars.
These tips are general in nature and are applicable in general circumstance without taking any special event in consideration.
It’s always advisable to take help from professionals to find the suitable solution that best suits your unique needs or objectives.
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