What is Lenders Mortgage Insurance(LMI)?
LMI is a type of insurance that protects the lender – not the borrower. For example if you can’t meet your loan repayments and the house is sold for less than your loan amount, LMI ensures the lenders loss is covered.
How to make Lenders Mortgage Insurance (LMI) work for you!
LMI means that even with a small deposit, you could purchase your new home now. Lenders like you to have 20% deposit and on a $400,000 loan you would need to save $80,000 which could be a very big task if your also having to pay rent.
LMI allows the lender to assurance they won’t be out of pocket if you default, and as a result they will allow you to borrow up to 95% of the purchase price of your home.Note if you can save 7-8% deposit you may even be able to capitalise the LMI (this means add it to the loan so you don’t have to pay for it in cash).
How much does LMI cost?
The cost of LMI varies depending on the percentage of deposit you have from 5-20%. It could be between $1k – $30K+. So in many cases if you look at the cost of your rent for the next year or so while you save the additional funds, you could get into your home now rather than pay someone else’s rent while you save.
For these reasons, an accurate cost of LMI cannot be given until a property and lender have been selected, and could be a flat fee of up to thousands of dollars.
The LMI premium is a one-off, non-refundable fee which is paid at loan settlement. For most lenders, the LMI fee can be included in the loan amount. If the LMI is added into the home loan amount, the borrower will pay interest on the total loan and it will increase the minimum monthly loan repayments.
LMI is arranged by the lender, not the borrower, although the borrower pays for it. Each lender has their own policy regarding when LMI is required and how much it will cost. If a borrower refinances their loan, the premium is not transferable. If LMI is required on the new loan, a new premium must be paid.
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