How Lenders Mortgage Insurance Works
Lenders Mortgage Insurance can be the difference from getting into a home now or having to wait years to save a larger deposit. Firstly, Lenders Mortgage Insurance also known as LMI is an insurance premium you need to pay to protect the lender in case you default on your loan.
- When might you have to pay? – Usually, you need to pay LMI when your loan goes above 80% loan to value ratio, meaning you have a lower than 20% deposit.
- What’s it for? – In case you default on your loan and the bank needs to sell the property, if the sale isn’t enough to cover what you owe, then LMI will cover the difference.
- Why would you want it? The benefit for the customer is that it can mean getting into the property market much sooner with a lower deposit, which, with rising house prices, can mean you’re still much better off in the long run, as sometimes property price increases can outpace the deposit you’re saving
How does it affect your repayments
LMI will affect your repayments in 3 different ways
- The premium you pay gets added to the loan; a higher loan amount means higher repayments
- Usually, a lender will apply a higher interest rate when LMI is attached to the loan, which in turn means higher repayments
- Having a smaller deposit also means needing to borrow more than if you had a 20% deposit
Here is an example through a local Tasmanian lender MyState Bank
Purchase Price of $750k in Hobart
- With a 20% deposit plus costs = a loan of $600k at 6.19% = monthly repayments of $3,671
- With a 15% deposit plus costs = a loan of $645,051 at 6.39%, including $7551 of LMI = monthly repayments of $4,030.61
- With a 10% deposit plus costs = a loan of $690,515 at 7.39%, including $15,510 of LMI = monthly repayments of $4,776.25
You can play around with our calculator here Repayment Calculator | Fortify Loans
Why do different Scenarios change how much the LMI and repayments are?
Multiple items come into play when assessing how much your interest rate and LMI are
- How much is the total loan
- how much of a deposit you have, the closer you are to 20% deposit, the lower the LMI premium and the better the interest rate
- Interest rates usually work on a tiered basis – loan-to-value ratio below 80%, between 80-90% and above 90% (the final loan-to-value ratio is determined after LMI is added on top, not before)
Why choose LMI over saving a deposit for longer
LMI gets you into the property today even if it does cost you more upfront, remember that a $750k purchase today could be a $800k purchase next year, meaning that 20% deposit keeps getting higher and higher pushing you out of the market.
Are the Higher costs worth it?
Although you do need to pay the premium for the LMI, the interest rate itself can be negotiated with the lender once you’ve paid of enough of your home loan so that its below 80% loan to value ratio, meaning after a couple years, you can then have the rate you would’ve had with a 20% deposit without having to save that deposit
Can LMI be avoided without a 20% deposit
Absolutely, there are several ways to avoid LMI premiums
- Government schemes for first home buyers, more info here First Home Buyer Loans Hobart, Tasmania
- Parental Guarantors
- Types of employments in special fields (medical, professional, etc)
- Some lenders will still waive LMI with close to a 20% deposit, but will still need to pay a higher interest rate
What does all this mean for a borrower?
That’s where speaking to a broker can very much come in handy; we can help way up the costs if you were to buy now vs buying a few years from now and help you understand what might be best for your situation. If you’re unsure about how LMI could help you, the Fortify Loans team works with home buyers and Investors across Hobart & Tasmania.
