As you delve into the world of homeownership and when applying for a home loan, you may find that some banks and lenders require what is known as Lenders’ Mortgage Insurance. Understanding what it is and how it works is a good practice, as it will give you a clear view of your future scenario in case you push through with this mortgage type.
In contrast to other insurance policies, Lenders’ Mortgage Insurance, or LMI, is not designed to protect you, the borrower. Instead, it is meant to provide the lender with extra security in the event that you default on your loan repayments. It is a one-off payment made by the borrower at the time of getting the loan settlement. LMI is usually requested from borrowers with a low deposit, meaning they are borrowing over 80% of their new home’s value.
Home loans involving LMI are particularly popular amongst first home buyers. LMI empowers young buyers to enter the market and realise their dream of owning a home despite not having enough deposit or 20% of their desired property.
How does it work?
Should you default on your mortgage repayments, your LMI will allow the lender to repossess the property that is tied to it. But in cases when the property has devalued since the initial loan was settled, the LMI takes over to cover the projected value that was lost. Again, LMI covers the risk that the lender might face later on while your loan with them is still active.
An important reminder regarding LMI is that as the lender decides on it, the homeowner has no say in which LMI provider will be used. The two main insurers in the country are Genworth Financial and QBE LMI.
How is LMI calculated?
LMI is a percentage of your loan amount calculated based on your Loan to Value Ratio (LVR) and the total amount of the home loan. The higher those two are, the higher your LMI payment will be. Other factors that may also affect your LMI costs include:
- The type of loan you are getting
- The bank or lender that you have chosen
- The LMI provider
- Whether you will occupy the residence being bought or not
- Your employment status, which could include being self-employed or paid as a PAYG employee
- Your savings amount
- Whether you are using a first home-buying scheme such as the First Home Owner Grant
LMI is usually a misinterpreted concept by borrowers. Without fully understanding it, borrowers could be discouraged from proceeding with home buying. Worse, they might unknowingly take on risks that are hard to fix later on.
Its main benefit is giving you the opportunity to buy a home quicker than you can when you wait and save for enough deposit. This is especially helpful as property prices are continuously rising. You would want to enter the market now rather than later when prices have spiked.
An expert mortgage broker should be able to guide you through all of the benefits associated with this choice and help you during your negotiations with the lender.
Waived or Discounted LMI
In some instances, the LMI can be waived or discounted by the lender. But certain criteria need to be met:
- You have a guarantor
- Your profession is one of those preferred by the lender (for example, doctors, accountants, lawyers, etc.)
- You have applied for a government grant
- The LVR is only a little bit higher than 80%
Find out if you are eligible to waived or discounted LMI. Your Lendstreet mortgage broker will study your scenario meticulously and coordinate with the lender for them to consider skipping this requirement.
Professionals that are not required to pay LMI
Many lenders have much more confidence in lending money to specific professionals as they are considered low-risk borrowers. Even if their LVR is less than 80%, lenders can consider waiving or discounting LMIs for the following:
- Accountants, chartered accountants, and financial analysts
- Doctors and other medical practitioners
- Lawyers or barristers
- Mine surveyors, geologists, or those working in the mining and energy sector
- Athletes and entertainment professionals
At Lendstreet, our expert mortgage brokers will be able to assist you with the entire process of getting a home loan and discussing its terms with the lender. They will also be able to address all of your questions about LMI and see if they can assist you in waiving it or reducing it. Contact us now!