The issue of Lenders Mortgage Insurance (LMI) is a question that regularly comes up when guiding clients through property purchases. With housing prices continuing to rise and stagnant wage growth, getting into the property market is becoming increasingly more difficult. Rising house prices and lower wage growth ultimately leads to lower deposits and if you don’t hit the 20% deposit mark, Lenders Mortgage Insurance now comes into play.
Lenders mortgage Insurance, in spite of its name, provides no protection for you as the borrower, whatsoever.
It covers the lender in the event that you are unable to repay the loan, and the property needs to be sold for less than the amount that is owing. So if you are trying to buy your first home for $600,000 and only have a $60,000 deposit or 10%, you can expect to have to come up with an additional amount to cover your lenders mortgage insurance bill. Typically a LMI cost on this size of loan would exceed $12,000.
Given how expensive LMI can be, we regularly have to guide clients through this process as there is no one size fits all answer. There are several key questions that need to be asked when assessing whether it’s worth paying LMI or not, and whether there are strategies that can be used to either minimise or eliminate it altogether.
As a starting point, if there is a way you can avoid paying LMI, you should always explore this option first. Ways to avoid paying LMI include:
These are all valid options, however each of these comes with its own trade-offs. Trying to save another 10% to get to a 20% deposit may mean that property prices go up even more in the time it takes to save.
Borrowing money from family or having someone else go guarantor on your loan has much greater potential consequences in that if you default, the loving gesture of a friend of family member may put their financial security at risk as the bank will come after them if you default.
Finally, sometimes a smaller house just isn’t going to do the job.
In reality LMI may be unavoidable.
Unfortunately there are no black and white answers when it comes to LMI. All we can encourage you to do is ask the right questions. What are your priorities? What are your real options? It is important to understand the implications before you make a decision.
If you haven’t gone through this journey before it’s also important to get the right advice. A good mortgage broker is invaluable, as well as unbiased financial advice from an adviser who isn’t selling you the property.
This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based on this information.