Lender’s Mortgage Insurance
I would suggest that if you’re reading this, there’s a good chance you have heard of the term Lender’s Mortgage Insurance (LMI for short). And whilst many have heard the buzzword “LMI”, you may not fully understand its existence and how its applied in the real world.
Before we dive into more detail, the most important thing to understand is that every client and their situation is different. People will inevitably have different property ownership/investment aspirations for their portfolio. With that in mind, lets get started:
What is LMI? It is an insurance paid by the borrower that can allow you to take out a loan with a lower initial deposit on a property. It can be paid upfront (much like stamp duty), or it can potentially be capitalised into your home loan. LMI is insurance that protects the Lender and not the borrower.
When do you incur LMI? If your Loan to Value Ratio (LVR) exceeds 80%, that is; your loan amount divided by the Bank’s valuation of your property is higher than the 80% threshold, you will be liable for LMI.
Why? The deposit that you have saved up, might not be enough to cover 20% deposit + stamp duty. LMI can potentially let you own that dream home sooner rather than later. I mean, you wouldn’t want to miss out on a dream opportunity if it could be avoided right?
Many savvy investors used aggressive borrowing in order to pounce whilst the market was on the up. It allowed them to use it as a strategy to acquire more property using less initial outlay with the view that capital growth would more than offset the LMI expense they would incur if borrowing more than 80%.
Borrowing up to 90% LVR & NOT paying LMI? Earlier I had mentioned that when you borrow over 80% LVR you will incur LMI. Whilst true in most cases, you may have the possibility to have the LMI waived up to 90% LVR if you’re working in certain professions (Doctors, Dentists, Psychiatrics, Psychologists, Lawyers and Accountants).
Guarantor or Family Guarantee Loans? If your struggling to get a 20% deposit together, you may be able to get help from your parents in the form of a Family Guarantee Loan. By using a portion of the equity inside the parents property as further security, it means the child can avoid paying LMI whilst also not needing to have a large 20% deposit for the property.
Current Family Guarantee Loans are much more flexible than they have been in the past. The parents are now limited in their liability to only approx. 20% + costs (i.e. stamp duty).
How much does it cost? Like most insurance premiums, the actual cost of LMI will vary with each individual and their scenario. Calculators can give you a rough idea, but as always, it’s best to contact a Broker (that’s me) who can look at your particular scenario in far greater detail to ensure you are receiving the right information. Information is power, and as a broker I can enable that for you.
Now that you understand the terminology, it’s time to look at it in practice to see what it will cost you and how your deposit amount affects the LMI incurred.
For example purposes the following purchase will be used:
Purchase price: $650,000
Stamp duty (NSW): $25,068.50
Total cost: approx. $676,000
3 Varied Deposit Amounts & their LMI incurred
**please note that figures have been rounded up for the purposes of this example
As the above example demonstrates, small adjustments in the deposit amount have significant impact upon the amount of LMI that you will incur. The Lender takes into account the higher profile of risk when the borrower puts a lower initial deposit into the property; as a result of this the policy cost increases quite significantly. Especially once your LVR inc. LMI is over 90%.
I think its also prudent to remember that the example uses a purchase price that most in Sydney or Melbourne would consider low. Be aware that as the purchase price increases, so too does the LMI.
The mortgage broker difference? As a broker, we are dealing with LMI premiums on a very regular basis. It’s crucial that any buyer has the best opportunity to maximise their use of deposit funds towards a property vs paying too much LMI. There is almost a tipping point where it’s best to avoid heavy LMI premiums altogether and re adjust your budget to purchase a property that fits your financial situation more suitably. I have the knowledge and expertise that will allow you to save on unnecessary expense.
Further points of consideration
- GST and stamp duty are payable on the LMI premium
- In most cases LMI is not refundable if the loan is paid out early
- LMI is a once off premium that applies to the life of the loan
- Much like an expensive or exotic car, higher loan amounts can be more costly to insure, harder to insure, or un-insurable altogether i.e. the lender won’t consider your application due to risk.
For any further information on the above and how it will impact your purchase scenario, please don’t hesitate to contact me via phone or email.
0451 668 673