Sometimes called "LMI", banks and lenders use lenders' mortgage insurance when the amount of equity in your home (or the amount of deposit you have) is lower than their required safety margins. Thus allowing you to enter the property sooner, compared to saving for that impossible deposit.
How much does LMI cost?
Mortgage insurance sounds like such a great idea - until you learn it's there to protect the lender and not you. Rather than say no and decline your application, instead they simply take out insurance protection to protect themselves against any potential losses they may incur.
The cost of LMI will vary depending on the actual loan amount where the higher the loan the higher the risk and also the loan to value ratio on the property. Typically mortgage insurance can be in the thousands, you can use a special calculator which will help you get a rough idea.
This premium is a one-off charge, applied when you purchase your home or refinance at a high loan-to-value ratio. Many lenders will allow you to capitalise the cost onto the loan amount.
When is LMI charged?
Normally when you have only a small amount of equity a mortgage lender might consider lending you money to be a bigger risk than lending to someone with a bigger deposit.
In most cases, banks will charge a an insurance premium on any loan that is more than 80% of the purchase price or valuation of your home. The exception to this rule is with low-doc loans, where banks may charge mortgage insurance for any loan exceeding 60% of the home's value or purchase price.
Instead, the option of paying a premium to cover the bank's risk means you can enter the real estate market now instead of waiting years. The greater the perceived risk to the lender, the higher the premium may be.
Can I avoid paying Lenders Mortgage Insurance?
Yes you can. You'll need to have a deposit or equity that's 20% or more of your home's purchase price, plus you'll still need to pay any government fees and stamp duty that may be charged as well.
Mortgage Insurance may initially seem like an unnecessary cost, but in reality it could be the tool that helps you get into your home sooner rather than later.
Do LMI premiums differ between lenders?
Yes, different lenders charge different premiums. Your Choice Home Loans broker has access to over 30 residential home loan lenders and can provide an estimate of their individual LMI premiums.
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