Saving for your own home is no small task, and if you don’t have the 20% deposit asked for by the banks, you’ll likely end up paying Lenders Mortgage Insurance (LMI). But how much is LMI and how do you minimise it? To answer this question, let’s go through everything you should know about LMI and how it applies to you.
Darren Walters’ unique no or low deposit new home system has helped thousands of renters become homeowners over the years. And a big part of this is capitalising on LMI and using it to increase your chances of entering the property market. Many of our clients thought homeownership was always going to be out of reach for them. But that wasn’t true!
In fact, by simply filling in our pre-qualification form, they were able to discover their factual options and begin the journey to becoming a homeowner.
What is LMI?
LMI is insurance that most banks and lenders will make you pay if you don’t have a 20% deposit. Its purpose is to protect the lender from any financial losses they could incur if you don’t make the repayments. If you default on the loan and the sale of the house doesn’t make up the difference left on the loan, the lender can claim the LMI insurance policy. The insurance agency then has the right to chase you for the amount they paid to your lender.
Lenders usually prefer LMI to be paid for upfront, however, most will let you add it to your loan repayments and pay it off over time. Doing it this way will incur additional interest, however, it will make the repayments much smaller and more manageable.
Here’s an example to explain how LMI works.
Steve gets a home loan of $400,000 from his bank. His deposit was less than 20% so he has to pay LMI. Steve pays off $10,000 but then loses his job and defaults on the loan. The house is repossessed and sold for $300,000 due to a downturn in the market. This leaves $90,000 unpaid and owing on the mortgage. Steve’s lender files a claim to their insurer for the $90,000. At this point, the insurer will then chase up Steve to pay them the $90,000.
The Benefits of LMI
While it can sound like LMI is a bad thing, there are actually several benefits to it.
The first and most obvious benefit is that it means home buyers have access to mortgages without a 20% deposit. In fact, LMI was created to increase the number of home buyers and enable renters to borrow without the huge deposit required by many lenders.
There’s also the fact that the property market is almost always strong. Historically, property prices have doubled every 10-15 years in Australia. This means, in the rare event that you default on your loan and your house needs to be sold, that it will likely sell for more than you originally purchased it for. So your lender won’t need to put in an insurance claim and you won’t be liable to pay for it.
Property prices are on the rise and paying for a small deposit with LMI allows you to get into the market now. The longer you wait, the more difficult it’ll be to get out of the rental market and gain the freedom of having your own home.
Don’t miss out on your chance to enter the property market. Take the first step today by filling in our quick pre-qualification form and let Darren’s no or low deposit new home system guide you out of the rental nightmare and into your own home.
How Much Does LMI Cost?
The actual cost of the LMI will depend on a variety of factors. Your lender will perform a risk assessment during your application to figure out how much they’ll charge you. We can’t give you an exact number, but we can give you a ballpark figure of the cost. You should also consider the added cost of interest over time if it’s not paid for upfront.
Estimated LMI Costs
|Loan Amount||LMI with 5% Deposit||With 10% Deposit||With 15% Deposit|
*Note these figures are estimates and your LMI can vary depending on your personal situation.
What Affects the Cost of LMI?
There are a few factors that can affect how much LMI you’ll pay. The lender will consider all of them in the risk assessment of your application.
What’s the Size of the Loan?
The more money they lend to you, the bigger the risk. Every loan they give out is an investment in you paying it back with interest, and if you were to default on the loan, they’d probably take a loss. So, the higher the potential loss, the higher the LMI.
How Much is the Deposit?
Is The Property to Live in or an Investment?
Some lenders and insurers will give you a different LMI because you’re using the property to make a profit. It’s considered to be less of a risk and some insurers will charge less in these cases.
What is Your Employment Status?
Your current employment status may influence the price of your LMI. If you have full-time employment, you’re more likely to get a better LMI, compared to someone with casual employment.
The Insurer Chosen by the Lender
The price you’ll pay for LMI will also change depending on who the insurer is. Unfortunately, you won’t have much control over this, but it’s something to consider if you’re looking at multiple lenders during the home loan process.
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- Secure Your New House with No or Low Deposit
- Home & Land Packages – The No1 Property Guide Difference
How Do I Avoid Paying for or Reduce the Cost of LMI?
There are a couple of ways you can minimise the cost of the LMI or remove it completely. By effectively using these tactics you can save thousands on your mortgage.
Increase Your Deposit
When you apply for a home loan the banks will typically require LMI for any deposit under 20%. Increasing your deposit will reduce the cost until it gets to 20% when you no longer need to pay for LMI.
Have a Guarantor
The First Home Loan Deposit Scheme
The answer to the question of how much is LMI isn’t straightforward, and it’s dependent on a lot of factors. But there’s one thing you can be sure of, if you get your new home with No1 Property Guide, you can be assured your homeownership journey will be as smooth as possible.
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