Even with doing the proper research, it can be difficult to know everything you need to know when it comes to home loans. Although a mortgage broker can help walk you through the ins and outs of particular home loan products, there are still mistakes that home buyers make, especially if it’s their first time wading into the waters of home ownership.
Some of these mistakes are tied in particular to Lenders Mortgage Insurance, or LMI, which may be mandatory, depending on your specific home loan and other factors. Learn from these most common LMI missteps, and you won’t suffer the consequences that others have.
- Thinking that LMI protects you
Generally speaking, insurance is to protect you in the unlikely event that an unforeseen circumstance harms your property, health, or life. You pay premiums, and the insurer pays you a specified sum in the event that an incident occurs, or directly covers the cost of the damage or care needed to remedy the situation. Lenders mortgage insurance is different, though, in that although you pay for it, the insurance coverage is there for the protection of the lender, not you. In the event that you default on your home loan and the home needs to be sold to cover the costs of the home loan, LMI makes sure that the lender is paid if there’s any remaining balance. The insurer can still hold you responsible for that amount, but the LMI provides some reassurance to your lender that they won’t be taking a big risk by giving you a loan.
- Getting unnecessary LMI
You only need to purchase LMI if you have a down payment that’s less than 20 per cent of the purchase price of the home – in other words, if you have a loan-to-value ratio of more than 80 per cent. Once you start looking for homes, however, you may be tempted to push your budget and buy a more expensive home and just swallow the cost of LMI. If you can avoid that situation, do.Borrowing more than you need and pushing the loan value higher than necessary can making expensive lenders mortgage insurance (LMI) necessary and add thousands of dollars to your loan amount. That may not seem like a lot of money in the grand scheme of things, but it’s still money that could be in your pocket. A simple lenders mortgage insurance calculator
will help you work out if you need LMI or not.
- Not knowing if the premium is refundable
If you do end up needing LMI, then you should know whether or not a portion of your premium is refundable. Depending on your lender and insurer, it may be possible to have your property reevaluated and get your loan secured against the new market value, because the premium will be less expensive if your property is valued higher. This process has to take place within a certain period after settlement, and the reevaluation and loan variation will probably cost you a few hundred dollars. You could get up to 40-50 per cent of the original premium refunded, although the stamp duty that you’ve paid as part of the mortgage insurance contract isn’t refundable. Once the property is sold or the loan repaid, mortgage insurance is refunded to the lender or direct to the borrower within 30 days of the repayment of the loan.
- Not knowing your options
If you think that you have to get LMI, then there may be options that you don’t know about – and if you don’t know them, then you can’t consider them properly. One example that first-time home buyers often overlook is the option of getting a security guarantor on your home loan. A family or friend can use the equity in their property and offer it as security for your loan so that you can reach the 80% LVR required to avoid buying LMI. They should know the ramifications of this offer, as they’re officially on the hook for the balance of your home loan if you default. This arrangement may also make it more difficult to them to use their equity for other reasons, so definitely consult with a broker first to make sure that it’s a good decision for all parties involved.
- Forgetting the premium
It’s one thing to know you’re going to have to get LMI. It’s another thing altogether to forget paying it upfront. It’s not required that you pay the LMI premium upfront, as you’re able to roll it into your mortgage. If you do choose to do so, however, don’t forget to have that extra cash when you’re getting your deposit and other fees ready.
- Know what you’re purchasing
LMI is often confused with mortgage protection insurance, or sometimes even income protection. Although these other types of insurance can be used to pay off a mortgage in the event of a death, they’re not the same as LMI. Income protection will cover home loan payments for a set period of time while they are unable to work due to an illness. Mortgage protection insurance provides either a lump sum or an ongoing payment to cover your mortgage repayments if you die or suffer an injury/illness. Both of those insurance types are meant to protect you in the event that you can’t make your mortgage payments, while LMI is designed to protect your lender.
- Assuming that your LMI won’t change when you refinance
Although there may be exceptions, LMI generally stays with one particular home loan, which means you can’t take it with you if you switch lenders. Depending on your insurer, you may be eligible for a partial refund on your insurance premiums, but as mentioned, there are time limits associated with that, so make sure you know those before you decide to refinance. When you speak with your mortgage broker, they will help you determine whether or not you have enough equity in your home to require LMI when you refinance and/or switch to a different lender.
Lenders mortgage insurance isn’t a bad product. In fact, it could be the tool you need to get the mortgage that you want much faster than you would’ve been able to otherwise. But make sure you know what you’re getting into before you sign on the dotted line.
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