All You Need to Know About Lenders Mortgage Insurance
Did you know that 70% of borrowers mistakenly believe that lenders mortgage insurance is there to protect them in case they default on their loan? A lot of new terms get thrown at you during this process and it can be confusing.
Today we are going to explore lenders mortgage insurance: What it is, why you would need it, and how you would get it.
So let’s get into it so you can go into the home buying process with as much information as possible.
What is Lenders Mortgage Insurance?
Simply put, this is insurance to protect the lenders. They are about to loan you a clearly sizeable amount of money, and they need a backup plan in case you can’t pay it back.
Now, this is not to be confused with mortgage protection insurance, which is another term you’re going to hear during the home buying process.
Mortgage protection insurance is there for you, the borrower, in the case you’re not able to repay the loan because of a serious setback like a loss of employment or debilitating injury/illness.
Think of it this way:
Mortgage Protection Insurance: In place to protect you – the buyer – if you can’t pay
Lenders Mortgage Insurance: In place to protect them – the lender – if you can’t pay
Now that we’ve separated those two terms, let’s take a deeper dive.
Why Would I Need Lenders Mortgage Insurance?
You need LMI if you have to borrow more than 80% of the purchase price of your new home. Lenders need a 20% deposit from you, to protect them in case the property has to be sold in the case of a foreclosure for a price that’s less than the loan amount.
Yes, the property acts as security. But a serious downturn in the local housing market might mean that the lender could have a big difference to make up for depreciating house prices. Real estate can be a tricky game for lenders, too.
Some private lenders don’t require LMI approval. But as an alternative, they will charge their own surcharge or fee. This fee is typically more pricey, but it ultimately means you can buy a house, even if you can’t meet the insurer’s eligibility criteria.
How Does the Process Work?
It’s actually quite simple. LMI can be taken out by just about any institution that offers home loans. The policy sits with the lender and the premium is passed on to the borrower who is incapable of fronting a 20% deposit. So in most cases, the lender will add the entire fee of the insurance onto your new home loan. You may not need to pay the bill up front.
How Do I Apply For Lenders Mortgage Insurance?
Again, this is to protect the lender, not you. So you’re not the one who has to apply. Your lending institution will apply for it and they will go over this during your loan approval process. They will determine whether or not you need to pay LMI.
They will likely get LMI through one of the major players in the Australian market.
- St George LMI (SGLMI)
- QBE LMI
- Westpac LMI (WLMI)
How Much Does LMI Cost?
This is a one-off payment for the entire term of the loan, unlike other traditional insurance policies. Customers can also add the premium to the balance of their home loan.
Of course, the exact numbers will vary depending on a number of factors like the price of the property in question and how much you – the borrower – can pay upfront as a deposit.
Like anything, there are a lot of online calculators out there designed to give an estimate of what LMI could cost. The emphasis here is on “could.” Putting too much stock in these is a common mistake.
These calculators give you an estimate, at best. So, you really need to get your numbers from your lender.
What Types of LMI Are There to Choose From?
Most mortgage insurance companies provide a variety of residential home loans. This may include:
- Construction home loans
- Property investment loans
- Low documentation loans
- Bridging finance loans
- Home improvement or extension loans
- Interest-only loans
- Principal and interest loans
- Owner-occupied home loans
LMI Can Also Help You
LMI is there to protect the lender, but it can also help buyers like you. It can help first-time buyers, anyone who will be buying without help from their parents, or those who don’t have a large amount of savings.
Putting away that 20 percent deposit can be a lot to ask of some people. They’re tired of throwing their money away on rent, but they haven’t been able to save that much.
But paying LMI means that these people, particularly first-time buyers, can afford to buy a home, even in competitive markets. They also have the option of adding the cost of LMI to their loan, meaning they don’t have to pay that upfront either.
How Can I Avoid Paying Lenders Mortgage Insurance?
As we stated before, you can avoid this if you manage to save a deposit of 20% or more of the purchase price, as well as the potential extra costs like stamp duty in solicitor fees.
Or you can use a guarantor. This is almost always your parents, who will offer their property as extra security for your loss. That way, your loan will be secured by your property and their property.
This is definitely an option, as long as you keep in mind that if you default on your loan, their property could obviously be sold. And it also makes it very difficult for them to sell their property.
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