21 December 2017 - 13:42,
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What is LMI and how can you avoid this extra expense with your first home?
LMI is Lenders Mortgage Insurance. It’s a fee you, the borrower, pay to the lender if you have less than 20% as a deposit. It protects the lender in the event you default on your home loan. It does not protect you.
With most LMI policies, the lender can make a claim if you default on your loan and the sale of the property doesn’t equal the value of the mortgage. It is why 90 to 100% home loans are considered higher risk for both the lender and borrower.
How much LMI you pay, and whether you have to pay it at all is dependent on a few things.
- Your deposit
A 20% deposit will ensure you don’t have to pay LMI. If saving 20% isn’t practical, save as much as you can. The higher your deposit, the lower the amount of LMI you will be required to pay.
- The size of your home loan
The amount you borrow will impact the amount of LMI you pay because LMI is worked out as a percentage of the loan. A loan of $500,000 on a property worth $550,000 will incur a LMI fee of approximately $13,500. Whereas the same property with a loan of $490,000 will only incur a fee of approximately $9,500.
- Your occupation
The work you do and the type of employment you have impacts your risk factor for lenders. A full-time worker is considered lower risk than a casual work and occupations such as doctors and dentists are also considered lower risk so have more options.
- The insurer
As with any type of insurance, it is available from a variety of insurers with a slight difference in cost between them. The two main ones in Australia are QBE and Genworth, however, smaller options are around usually owned by the lender you are borrowing from.
How can you avoid LMI?
- Have a deposit
The most obvious way to avoid LMI is to have a deposit of 20%. LMI is only payable when the loan is more than 80% of the value of the property.
- Get a guarantor
A guarantor is not the same as someone co-signing the loan. They are linked to the loan will be held liable if you default on the loan, however, they can be released from the loan before it is repaid in full. Guarantors are usually parents helping their children get into the property market.
- Your occupation
As mentioned, some lenders have other options for certain occupations. These occupations typically include doctors, dentists, medical professionals, engineers, accountants and similar occupations.
Paying LMI is not the end of the world. It is an extra fee, however, depending on your circumstances, getting into the property market sooner rather than later can sometimes be more beneficial than waiting until you have a 20% deposit.