What is Lenders Mortgage Insurance?
What Is Lenders Mortgage Insurance (LMI)?
LMI is an insurance policy which covers the lender in the event that you were in serious default on your loan, and the sale of your property still did not recover the loan. LMI is generally applicable once a loan has a Loan to Value Ratio over 80%, in simple terms this means in most cases a deposit of 20% (of the purchase price +Stamp Duty and other costs) is necessary if you want to avoid paying Lenders Mortgage Insurance. LMI can be a costly affair and therefore worth exploring strategies to avoid it!
Loan to Value Ratio (LVR)
LVR is the amount of money you wish to borrow over the value of the property that you wish to use as security. For example, let’s say the loan required is $440,000, and the property you wish to use as security is worth $550,000, then the LVR would be 80%.
Why Is The LVR Important?
LMI is calculated on a sliding scale based on the LVR. A higher LVR is considered a higher risk, so the cost of LMI increases in line with the LVR.
How Can You Avoid LMI?
The key to avoiding LMI is to reduce the LVR, this can be done by:
- Saving more deposit
- Help from a Family Member/Friend in the form of:
- A Gift – This can come in the form of a monetary gift usually from a family member, that is not repayable or refundable
- Family Security Guarantee – A family member (usually the Borrower’s parents) can offer support by using the equity from their own property. This equity / property is used to guarantee a portion of the Borrower’s loan amount (up to 20%), not the entire loan amount
- Some selected Lenders can potentially waive the LMI costs for certain professionals
- Some Lenders can waive the LMI costs up to 85% LVR irrespective of your profession
The cost of LMI is a fact of life for most first home buyers, and even some second home buyers and investors. The LMI cost can be added onto your loan in most cases. So even if you are not in a position to avoid it, by working with your First Point Group Consultant we can help you to determine the cost and viability of proceeding with a loan that suits your particular needs and objectives.