At a time when an average income couple takes up to 5 years to save for a deposit to purchase a home in any of Australia’s capital cities, paying LMI could be an alternative to waiting to save up a deposit, especially in markets where property prices continue to soar.
Yes, Lenders Mortgage Insurance (LMI) can help you buy a property if you don’t have a 20 percent deposit for buying a home. However, a recent survey reveals that 40 percent home buyers do not understand what LMI is. According to the results of the survey, 8 percent of the respondents thought that mortgage insurance protects the borrower while 18 percent assumed that it protected both the lender and the borrower.
Unfortunately, LMI only protects the lender in case a borrower defaults on the home loan, in which case the insurer makes good the losses to the lender. Besides, if you take LMI, it does not mean you will be absolved of your responsibility to pay off the debt if you encounter financial difficulties. While your insurer will pay the outstanding amount to your lender, don’t be surprised if you are chased by the insurer to recoup those funds, reports an article on ABC News that points out 70 percent of households falsely believe that LMI protects them rather than the lender.
What is LMI?
In the simplest terms, LMI could be defined as a tool that allows home buyers to purchase a property with less than 20 percent deposit by protecting lenders against payment defaults. The risk of lending is transferred from the banks to the insurer, facilitating high LVR loans for the borrowers.
The concept was introduced in 1965 to facilitate home loans for borrowers who had less than 20 percent deposit or were considered high-risk borrowers (such as low-doc borrowers) by the banks. LMI can be paid as lump sum or rolled into your loan amount, in which case it will also attract interest.
In short, LMI can be considered a necessary evil that can help you climb the property ladder despite a low deposit. However, LMI does not protect you; it protects the interests of the lender in case you default on your home loan.
Should you wait to save up a deposit or pay LMI?
Currently, the median dwelling price in Australia is $554,605, which means a first home buyer (FHB) needs over $100,000 in savings to put down a 20 percent deposit for purchasing their home; a significant challenge, indeed. While many FHBs turn to their parents for help, in such cases where no guarantor or help from the bank of mum and dad is forthcoming, LMI can enable low-deposit borrowers to purchase their dream home without waiting.
“By paying LMI, home buyers can purchase a home immediately with a smaller deposit instead of delaying the purchase to save a sufficient deposit,” explains Ruth, a HashChing mortgage broker. “However, just like any other financial product, home borrowers must understand what is LMI and read all the terms and conditions of insurance before deciding to purchase a property with LMI,” she adds.
The reason why Ruth stresses on reading the fine print is that many people who take LMI are not clear about the benefits of LMI. A large number of borrowers don’t understand that once the bank gets paid out, they could still be left in debt to the insurer. “By knowing the conditions of the policy, you know what exactly you are getting into,” she explains.
Speak to an expert
“LMI is only payable if the refinance or purchase exceeds 80% of the property value. In saying that, there are a couple of lenders that don’t charge LMI even up to 85%. Furthermore, depending on your profession, there are lenders who offer to lend at 90% LVR without having to pay lenders mortgage insurance,” explains Michael, a mortgage broker with HashChing.
In case you don’t have an adequate deposit and intend to take LMI, it could be a good idea to get in touch with a mortgage broker to understand your options better.
Your mortgage broker will not only find the most beneficial home loan deals for you but also help you understand LMI better, which means you can make educated decisions regarding your home loan. Speak to an expert now.
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By Vidhu Bajaj,
HashChing Content Writer