Lenders Mortgage Insurance: 5 things to consider

If you’ve been researching into buying your first home, there is a possibility you may have come across the term Lenders Mortgage Insurance or LMI, but what does this mean for you?

Imagine for a moment that you could purchase your first property without saving the required 20% of the purchase price. There are many Key Workers (including employees within the Australian education sector) who find this savings goal to be daunting, particularly those on a single income, who may need to save up to three times longer than the general population for their deposit, according to the Deposit Gap Dilemma report.

For those who have investigated and know it is possible to service a loan, but are finding that saving for a substantial deposit for your first house is a challenging prospect, we have put together a list of important things to consider regarding Lenders Mortgage Insurance.

1.    Lenders Mortgage Insurance is a safeguard

Lenders Mortgage Insurance (LMI) is a one-off insurance policy which compensates the lender (i.e. your bank) for any losses that are incurred when a mortgage loan defaults.

So, if you (the borrower) were hypothetically to default on your home loan repayments, the LMI takes away the risk factor and protects the lender from any financial loss. So, in the event that a lender is not in a position to recoup the money owing on that mortgage when a house is being sold, they can claim the difference through their LMI policy.

With LMI as a protective measure, banks can feel more relaxed when they approve a larger quantity of loans, and lend larger amounts to prospective first home buyers.

2.    Home ownership may become a reality much sooner

With LMI, you can purchase your first home sooner rather than later, with a smaller deposit than would normally be required. In fact, the reduction of the lender’s risk enables first home owners to buy with as little as a 5% deposit.

In purchasing your first home with a smaller deposit, you are also opened up to a wealth of property options you may not have considered possible. With LMI now in place, more expensive houses in better locations, which would have been out of your reach previously may now fit your budget.

Teachers and other employees working within the education system who are struggling to save for their typical 20% deposit in our climate of rising house prices, may be able to move into their first home, years earlier than they ever thought possible, according to Deposit Gap Dilemma report.

3.    Yes, there is a cost involved

LMI is completely different from traditional insurance products, in that it is a once-off fee. This can either be paid upfront or added on to your home loan. If you add this premium to your loan your repayments will marginally increase over the duration of your loan with interest to cover the costs of the LMI premium.

Remember, different lenders have different rules, but as a general rule of thumb, if you’re falling short on the desired 20% deposit, your lender may see you as a potential risk which may require you to pay Lenders Mortgage Insurance.

At the time of writing, the average fee for LMI sits at $6,200. This calculation is variable from lender to lender, and factors to consider include how much you’re borrowing, your current employment status, and whether you plan on living in the home or whether it is going to become an investment property. You can always enquire with your lender what this fee will look like.

4.    LMI policy cannot be transferred from one lender to another

Later down the track, you may consider refinancing your home loan. In these circumstances you could be required to pay a new LMI policy if you haven’t had the chance to build up the equity of your property.

If your property still has low equity, you could be borrowing well over 80% of the property value again with another lender, which means they too will be looking for insurance protection.

If your loan is terminated within the first two years, the LMI fee that is being charged by your lender may be partially refunded, but in all other instances refunds are not guaranteed.

Remember, it is important that you carefully read your lender’s policy so that you have a greater understanding of what may be applied.

5.    There are other alternatives to LMI

LMI may not be appealing to all, as it does mean that you are generating a fee in addition to your existing loan. However, this doesn’t solve the problem of waiting for many years to save enough for a substantial deposit.

There are other avenues to consider, that may be preferable to you, either in reducing LMI or avoiding it altogether. These include:

o    Having a family member act as your guarantor

In the event that you cannot pay your mortgage, having a family member (often parents) as a guarantor means that they are providing their own savings and assets as security for your loan, meaning that responsibility falls on them to ensure payments are made.

o    Applying for the Home Guarantee Scheme

Introduced by the Australian Government, the Home Guarantee Scheme is another way that first home buyers can get into the property market sooner.

Under the Scheme, eligible applicants can purchase their first home with as little as 5% deposit without having to pay LMI.

Weighing everything up

Lenders Mortgage Insurance could help to prepare you for one of the most exciting times in your life, moving into your first home, much faster than you originally anticipated.

In the weighing up of costs and considerations with your current salary and budget plans, this option may be the right fit for your financial situation.

Next steps?

For more information on buying your first home visit our home loan resource centre or if you would like to speak to a Lending Specialist, our team is here to help.

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