What is LMI?
Lender’s mortgage insurance (LMI) is an insurance policy that banks take out if they deem a loan high risk. This fee is charged at the applicant’s expense and is due to in most cases not having a 20% deposit. Majority of the time this fee can be added onto the loan amount unless paid at out of pocket or does not fit the lender’s policy.
Why is it Necessary?
When a bank approves a loan application there is an acceptable amount of risk a lender will allow which is normally 80% of the purchase price (depending on lender policy). Generally, any further funding the bank will deem this as high risk. Further precautions are taken in these cases just in case you are unable to pay back the loan. This protects the bank and makes sure they are not out of pocket.
For example, if you were to purchase a property for $1,000,000 and had a $200,000 deposit. The loan to value ratio (LVR) would be 80%. This would generally not be considered high risk and LMI would not be required.
However, if you were to purchase a property for $1,000,000 with a $100,000 deposit. The loan to value ratio would be 90%. The lender would consider this high risk in most cases and LMI would be required.
Is LMI Avoidable?
The short answer is yes. There are a few different options you can use to avoid paying lender’s mortgage insurance.
Firstly there is the option of just continuing to save until you have your 20% deposit. But this may take more time and effort than you may feel comfortable with.
Secondly, the Australian government has released a scheme which waives the LMI for first home buyers to assist them in getting onto the property market. The scheme is called the First Home Loan Deposit Scheme. This has been mentioned in our previous article Tips and Tricks to get you on the property market sooner. Please be aware there are limited allocations available for this scheme and only certain lender’s have agreed to support this scheme. However, the scheme renews at the beginning of the financial year.
Other options which are not always available are to release equity from another property you own or receiving a non-refundable gift from a relative or close friend.
Need help with anything we’ve discussed in this article or want to run a scenario past us? Feel free to email us and we’d be more than happy to assist.
Disclaimer: This information is general advice only and if anything is taken from this article it is at the reader’s own discretion and KISS Solutions Pty Ltd trading as Jannar Financial Group takes no responsibility for any potential consequences from writing this article as any decision made to proceed with a finance application is at the client’s own risk.