What is Lenders Mortgage Insurance and Do I Need it?
Be very careful, because the waiting game could cost you a lot more than you anticipated. We have clients who chose not to pay LMI in the past year and now they’re facing a daunting challenge. Unfortunately, the property they were hoping to purchase has increased by three times more than the LMI they decided not to pay!
So: What Is It, and Do I Need It?
This product became available in order for lenders to provide high LVR loans (Loan to Value Ratio loans) whilst at the same time ensuring that the lender was not placed at any risk.
It’s important that you understand that it’s the lender who’s protected, and not you.
LMI is paid by you, as the borrower, and is a one-off payment made to the lender. This occurs either by being added to the loan amount as a capitalized amount, or it’s paid at Settlement. Your lender will determine whether they require you to have insurance, and this is probably going to affect you if your deposit on the required loan is less than twenty percent.
It’s important that you understand that it’s the lender who’s protected, and not you. LMI provides protection to your lender on the off-chance that you default on your loan payments. There is always a certain risk to a lender when they offer finance to a customer. They need to be assured that they can recover their money if their customer is unable to meet future home repayments.
Of course they already have your property as security, however if property values drop, the security they have in your property may not meet the outstanding loan amount when the lender sells the property.
By offering mortgage lenders insurance the lender now has a wider range of lending options because their risk has been reduced. What this means is that more people wishing to enter the home market are more likely to be accepted for a loan, thereby the dream of owning their own home becomes a reality much sooner.
Don’t confuse LMI with Mortgage Protection Insurance. These are two separate insurances, with Mortgage Protection Insurance covering borrowers in the unfortunate event that they’re unable to meet their mortgage payment obligations – this could be due to illness, unemployment, or even death. This is an insurance that is paid on an annual basis, with the amount varying depending upon the balance of the loan still due to be paid.
Why You Need LMI
You’ll be asked to pay Mortgage Insurance if you don’t have a large deposit for the property you’re hoping to purchase. With a low deposit, your lender will expect you to pay this insurance. You do of course have a choice about whether or not you take out LMI. If you prefer not to insure (some borrowers are concerned, and do feel that paying this insurance is a waste of their money) then you will be required to continue saving for a larger deposit. Once your deposit is sufficient to apply for finance without being required to take out this insurance, you can consider your purchase at that time. However, if your deposit is limited and you want to continue with the purchase of a property, you will be expected to pay LMI. Of course the issue with waiting to save for a larger deposit is that the housing market may improve much quicker than your actual saving rate.
This means, unfortunately, that whilst you still don’t have your foot in the property door, you also missed out on capital growth for the past year. Your desired property has now increased in price and you require an even larger deposit to buy your home. It can be quite a dilemma.
Property does appear to be on the move again, but still we see more and more clients missing out on purchasing opportunities because they’re reluctant to pay the Lenders’ Mortgage Insurance fee.
In actual fact, your property would only need to improve by 1-2% per annum in the first year to justify your LMI outlay. Of course we can’t predict the future and the expected growth rates over the next few years are anybody’s guess. Perhaps it comes down to this: no-one likes having to pay additional insurances, however it could be a small price to pay in order to achieve your goals.
We’re here to help you make these important decisions. We can compare what you could purchase today, both with and without LMI, and what your options may be in a year’s time – taking into account the anticipated growth of the property market. Give us a call and we’re happy to discuss and explore all these options with you. There are actually some really great incentives for our customers at the moment.
It’s certainly worth your while to make the call, and you have nothing to lose. You may discover that the insurance you’re required to pay (for a minimal home loan deposit) could be much less than waiting to save that additional deposit.
We’re always looking to find the best outcome for you.
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81 The Parade, Norwood SA 5067