If you have started scouting for a home mortgage, you must have come across the term Lenders Mortgage Insurance (LMI). Lenders Mortgage Insurance is an additional expense that you need to pay after a home loan approval, under the following conditions.
- Failure to meet the 20% deposit of the property value, even if you’re able to make a smaller deposit lesser than 20%
Your loan application is more than 80% LVR (loan to value ratio)
Not enough documents to prove your financial stability
Bad credit in your credit file
- Bottomline is that if lenders view you as a high-risk borrower, you could be required to pay Lenders Mortgage Insurance for their protection.
What is Lender’s Mortgage Insurance (LMI)?
This is an insurance that protects your lender in events of default on home loans. LMI is a one-time non-refundable fee that may be included in the loan amount or separately paid during the loan settlement. Refinancing a home loan will require you to pay for another Loan Mortgage Insurance upon approval and settlement of the refinance. In some cases, LMI can be refunded. It depends on the agreement of your lender and their LMI provider and if the loan is terminated earlier than the term of the loan.
Often times, when lenders agree to lend a customer money, there’s a risk that they may not get their money back when the customer faces financial burdens and are soon not able to make payments.
Home loans usually use the same property as security. Even if this is the case, property value declines and may not be enough to pay for the outstanding loan. LMI can cover this financial loss when the lender sells the property. LMIs also allows buyers to save time in saving for a down payment for their dream homes. With an LMI, buyers need to pay as low ass 5% to proceed with their mortgage application.
Loan Mortgage Insurance Providers
In Australia, lenders usually use one of the two large insurance companies – Genworth and QBE. Some lenders in Australia have their own LMI products therefore not needing to get LMI insurance from either of these two big insurance companies.
It is important to note that most home loans are being declined because the LMI provider rejected the application. These providers go through a thorough and strict investigation before they decide to approve any application. And if they see that you are not in good standing or find that your source of income is questionable, they can reject insurance anytime and therefore your loan is rejected too during the process.
Many specialized lenders in Australia don’t use Genworth or QBE, where they rely on their own LMI product. These lenders can provide more leniency on your loan application and therefore better chances of being approved.
How is Lender’s Mortgage Insurance Calculated
There are many factors that can affect the cost of the lender’s mortgage insurance. It is a one-off cost that will come down to four factors in general:
- the lender you choose
- loan amount
- size of the deposit you have
- the value of the property you want to purchase
Typically, the lender will buy the insurance and will pass the premium to the borrower with a non-refundable fee and due upon settlement. As an option, LMI could be added on top of your total loan amount. However, this move makes an impact on your monthly repayments as it has increased the money you owe.
To give you a rough idea of how much an LMI cost, you can use Genworth LMI calculator, where if you are taking out a loan of $300,000 and eyeing on paying 5% on deposit, this would cost you $7,610 in insurance at a loan term of up to 30 years. Lender’s mortgage insurance could be a huge amount to pay. Therefore, just like many borrowers, it’s worth scouting for alternative strategies to get away with LMI cost, if possible.
How to Avoid Lenders Mortgage Insurance
We already know that LMI could be a hefty price to pay. So let’s take a look at alternatives on how to avoid this when taking out a home loan.
A definite way to avoid this is to save up for your deposit, at least 20% of the property value you are eyeing to purchase.
If you have a family member with good credit standing, you may ask them if they could stand as your guarantor for the loan.
Improve your creditworthiness (if at the moment you have a poor or bad credit score).
If you are considering a guarantor, it’s important to know that your guarantor will have to understand that lenders will look at your guarantor’s property as a security for your loan. Also, if you are not able to make settlements, your guarantor is obligated to make payments on your behalf. In other words, they are going to assume much of the responsibility on the loan as much as you do.