Do I need to pay Lenders Mortgage Insurance?
Saving a deposit for a home can be a tedious journey; one filled with challenges, sacrifices and sometimes it even involves the buyer having to tap into a temporary secondary income, if they are to see their home ownership goal reached.
But with the introduction of lenders mortgage insurance - LMI, the mandatory cash deposit that is required to enter into a home loan and secure a property has been dwindled. This is allowing more buyers to snap up their dream home before it is taken off the market by another interested buyer.
Previous to lenders mortgage insurance, a buyer had to gather together at least a 20% cash deposit to be able to secure a property. But this has now changed to work in favour of not only the buyer, but also the financial institution that issues the home loan.
For the buyer, LMI has significantly cut down the long amount of time it can often take to save for a larger deposit, and the amount that needs to be saved. In this way, a wider range of people have been encouraged to enter the residential market.
But when will you need to take out this insurance? And how exactly will it affect your saved cash deposit?
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is widely considered a win for those carving out the path to home ownership because it allows the buyer to use a smaller saved cash deposit, to borrow a larger loan amount from the lender.
In fact, more than 80% of the property’s purchase price can now be taken out on a home loan, and the buyer only needs to show as little as a 5% saved cash deposit if the lender is to consider issuing them with the loan.
How is this possible? LMI works as a blanket of security for the lender, so in the case that a buyer’s financial situation shifts and they are no longer financially able to continue making repayments on the home loan, the lender won’t suffer any financial losses that may occur as a result of the buyer having to default on the loan.
As a buyer, you take out and pay for the LMI premium, but it protects the bank in case you can’t make your repayments.
This new wave of reassurance sweeping lenders has also allowed more home buyers to be approved for a home loan, particularly first-time home buyers, and those who were previously unable or found it difficult to save for a larger cash deposit.
However, it is important to note that this insurance shouldn’t be confused for a mortgage insurance product that works to safeguard the buyer.
In the case of LMI, protection is given only to the lender, and any insurance product to work for the buyer should be independently researched and sourced by the buyer.
How much does LMI cost?
Financial decisions are some of the most important decisions you will make, so it’s important to understand some of the other costs that are tied to entering into a home loan – and LMI often falls into one of these ‘hidden costs’.
This is simply because many first-time home buyers don’t expect that there is a fee that needs to be paid if they are to sign into lenders mortgage insurance, to then be able to borrow more than 80% of a property’s purchase price or show a 5% saved cash deposit.
Depending on a few factors, taking out this insurance can cost a buyer anywhere from a few thousand dollars, up to tens of thousands of dollars, so it’s important for its cost to be factored into the overall buying budget.
How much you are able to save for the cash deposit, the amount you would like to take out on the loan, your borrowing power, and whether the property will act as your primary place of residence or as an investment property, will all work to determine how much this insurance will cost you.
This calculator has been designed to help you calculate how much LMI you could expect to pay on the property you have your eye on.
The positive news is that the fee doesn’t always have to be paid up-front, like the saved cash deposit has to be, but there is rather the option to bundle the cost of lenders mortgage insurance into the home loan.
However, choosing to disperse the fee across the total life of the loan, and thus pay it down in increments, will mean that your monthly mortgage repayments will be higher, and you will be paying interest for the premium.
How to use the LMI Calculator
Prior to applying for a home loan with a lender, it’s a good idea to find out how much lenders mortgage insurance could cost you, and the earlier you know this, the more financially prepared you can be for it.
Forward planning will also help you to decide how you will go about paying for LMI; up-front, or in increments as part of the home loan.
Your Mortgage’s LMI Calculator can help you understand how much you will need to pay for over a 30-year loan term.
All you need to do is select whether you are a first-time homebuyer, and provide the value of the property and the total amount you will need to take out on the home loan.
Can I avoid paying this type of insurance?
If you are not prepared to factor lenders mortgage insurance into the overall buying budget, or you are not in a position to cover its costs, but you still want to borrow more than 80% of a property’s purchase price, there may be a way to get around paying the premium.
There are some banks and lenders that have a list of accepted professionals, who they will consider waiving or reducing LMI for. Those employed in the medical, accounting, finance, legal or engineering fields may be able to avoid paying it, or may be able to access a cheaper premium.
Regardless of your career, before entering into a home loan contract, you need to be confident that you are financially equipped to tend to repayments for the entire life of the home loan.
A qualified and professional mortgage broker or financial adviser can help you in better understanding your financial situation, borrowing power, and ability to take out a home loan, whilst also providing expert opinion on the buying options that are most suited to your circumstances and goals.
About this calculator
The results provided by the calculator are to be taken as a reference or guide only. Results only rely on the information provided and the assumptions that have been pre-set. Results are only based on a 30-year loan term, and the calculator doesn’t factor in the interest-rate costs to be paid on the home loan, and that interest rates can alter or fluctuate throughout the entire life of the loan.
There are also a number of other factors that influence how much lenders mortgage insurance can cost a buyer, such as their borrowing power, property type, and financial situation, which are also not considered by the calculator.
It should also be noted that results do not indicate the future financial circumstances of a buyer, nor do they act as a determiner. A formal assessment should be independently sourced, with the assistance of a financial adviser and/or mortgage broker who can provide a more accurate result.