The lender’s mortgage insurance (LMI) is one of the mortgage concepts that most people are confused of. A study by Gateway Bank and Genworth Insurance last year revealed that over half of millennial home buyers are unaware of what LMI means and what it does.
If you are planning to apply for a home loan anytime, you need to be aware of what LMI is and how it affects your loan repayments. Below are the seven mistakes most home buyers make when dealing with LMI:
1. Thinking that LMI protects you
An insurance protects 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 — while you will be the one to pay the premium, the coverage is actually for the protection of your bank.
In the event that you default on your home loan and the home needs to be sold to cover the costs of the mortgage, 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.
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 are different from LMI.
2. Getting unnecessary LMI
Given that some home buyers think that LMI protects them, many make a mistake of getting an LMI even when their loan deposit meets the 20% requirement. You only need to purchase LMI if you are borrowing more than 80% of the property’s value
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 — you need to avoid being in this situation as much as possible. Borrowing more than you need and pushing the loan value higher than necessary can add thousands of dollars to your loan amount due to LMI. 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.
To have an idea how much it would cost you to pay LMI, check out Your Mortgage’s Lenders Mortgage Insurance Calculator.
3. Not knowing if the premium is refundable
LMI is generally not refundable. However, there are some situations where you might be entitled to a partial refund of the LMI fee. For instance, if you are able to repay your loan in the full first or second year, you might be able to get a refund. This, however, will depend on your discussion with your lender and the insurer. You might also get a refund if the LMI policy is cancelled in the first 12 months of the loan.
4. Not knowing your options
If you do not currently have a 20% deposit, you might think that the only way is to go for a loan with LMI. However, you can consider other options that might help you prevent paying this additional cost.
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 are 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.
5. Assuming that your LMI won’t change when you refinance
Although there may be exceptions, LMI generally stays with one particular home loan. This means that you will not be able to transfer the LMI when you switch your lenders.
Depending on your insurer, you may be eligible for a partial refund on your insurance premiums, provided that you make the switch within a certain time period.
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 or switch to a different lender.
A mortgage broker will be able to help you with your concerns about LMI. Reach out to a professional by visiting Your Mortgage Broker. You can also read this guide to know how you can avoid paying LMI when you apply for a loan.