A common mistake made by borrowers is that Lenders Mortgage Insurance is a policy that you pay for to protect yourself, in the advent that you can no longer make your home loan repayments. If this is your understanding, then you’ve been misled!
So, what is Lenders Mortgage Insurance? How Does It Work? What is the Benefit of it and How can I avoid paying it?
Lenders Mortgage Insurance (LMI) is an insurance policy that the bank takes out to protect themselves against financial loss caused by the borrower not repaying their home loan. If a borrower can no longer afford their loan, then the bank will repossess that home, and sell it.
If the property is then sold, for less than the outstanding amount of the loan, then the bank would make a claim on the insurance policy (LMI).
To be perfectly clear on this, LMI exists only to protect the lender, and in no way does it protect you as the borrower. TIP If you are looking for something to protect you as the borrower, then Mortgage Protection Insurance is what you should consider. Alternatively, it would be advisable to speak to a professional about ensuring your risk insurances are adequate, like Income Protection, TPD, Trauma & Life Insurance etc.
LMI insurance can be costly and should be factored into your initial plan. Like most things, there are two ways of looking at LMI. Buying a property with a lower deposit, allows you to access into the property market sooner. Where the market is growing, this could mean that your cost of LMI is by far offset by the potential capital growth of your property, therefore you are the winner. On the flip side, in a stagnant property market, LMI can add considerable cost to your acquisition. Furthermore, you need to consider that LMI is not transferable from lender to lender, which means that if you are not satisfied with your lender, and your equity in the property is still under 80%, to move, you will need to purchase new LMI.
WHAT TRIGGERS LENDERS MORTGAGE INSURANCE
Trigger point for a lender requiring LMI differs by lender, however as a general rule, consider that most lender’s will require LMI when your borrowing amount is more than 80% of the property’s value. Fortunately, it is organized by the bank during the loan application process, so you do not need to organise anything and depending on your circumstances, it can sometimes be capitalised into your loan.
HOW TO AVOID LENDERS MORTGAGE INSURANCE
The easiest way is to have a 20% deposit. However, we all know that it is easier said than done. So other ways could be; have a family member gift you the funds or have a family member go guarantor over the loan.
Certain lenders are willing to accept non-refundable gifts as a deposit, although, they prefer such a gift to be held within a bank account for a minimum of 3 months, prior to the loan application.
Alternatively, if your parents have the ability, they can go guarantor over the loan. Which means if the borrowers can’t afford to pay the loan, the responsibility would fall to your parents. This can be a risky strategy and professional advice should be sought before making any decisions
LENDERS MORTGAGE INSURANCE – HOW DO I FUND IT?
One of the good things about LMI is that it’s not something you have to pay for out of your pocket. Lenders allow borrowers to borrow the funds to pay for the premium by capitalising it into their loan. TIP Clearly this is a good option, but also an option where you will pay the lender interest on the full amount of the LMI once it is drawn down.