06 Aug How Lenders Mortgage Insurance Can Get You into a Home Faster
Saving the deposit to purchase a home is never easy and it’s been made even more difficult after the strong growth in property prices that we’ve seen over the last decade.
However, there is a way for borrowers to get into a home faster, without needing to save a huge deposit. That’s where Lenders Mortgage Insurance or LMI comes in and the first person to speak to is your residential mortgage broker in Melbourne.
What is Lenders Mortgage Insurance?
Lenders like to see borrowers contribute at least 20% of the value of a property. This is usually enough in the eyes of the lender to cover the risk of the borrower defaulting on the loan or a fall in property prices. If they lend more than 80% (loan to value ratio), then they are potentially putting themselves at risk.
The deposit acts as security for the loan and allows the lender to seize the property and sell it if the borrower stops making payments. However, the value of the property may be less than the outstanding debt at that time, if market conditions affecting property values have changed.
Lender’s Mortgage Insurance (LMI) is the price borrowers pay to protect their lender’s interests if they can’t come up with the 20% deposit. The lender uses it to take out an insurance policy that protects them if the borrower defaults.
What this means is that you could get into a home faster as you won’t need to save as much as a deposit. You could potentially only need to contribute a 5-10% deposit and then pay LMI.
How Much is Lenders Mortgage Insurance?
As a general rule, LMI will cost you in excess of $10,000 for a $500,000 loan. However, the actual premium varies based on how much the borrower is able to contribute.
For example, there is a significant difference between a loan with an 85% LVR compared to a 95% LVR, in terms of the risk to the lender.
Your residential mortgage broker in Melbourne can give you an idea as to what this will look like.
If you decide to refinance with another lender, then you will probably have to pay for another insurance policy. That’s unless the amount you owe is below 80% of the property value. You should factor in this cost, before transferring to a ‘cheaper’ mortgage which may not turn out that way, which is why you need to work with your residential mortgage broker.
I Can’t Afford to Pay Lenders Mortgage Insurance?
If you can’t come up with the 20% deposit – or pay LMI – then the money still has to come from somewhere. Your family or friends may be able to help.
A guarantor is someone – often a parent – who underwrites payments in case the borrower can’t make them. However, they usually need to back up their promise by offering up an asset. This is becoming a pretty common way that first home buyers are able to get into the property market and it is possible to get 100% LVRs under the right circumstances.
Once again, the best person to speak to is a residential mortgage broker in Melbourne.
Guarantees are not something to ask for lightly. If you fall on hard times and can’t make your payments, then your guarantor has to make them for you. If they can’t, then they could lose the asset they put up.
A guarantee could also make it difficult for them to sell their house or even refinance.
Is Lenders Mortgage Insurance Worth It?
Lenders mortgage insurance is primarily there to secure the lender’s interests. However, it is a valuable tool that could get you into a home faster than you might have otherwise been able to.
Whether you’re a first home buyer or an investor, using LMI as a tool to get you into the property market can be very worthwhile. Especially in a market with rising property prices.