Lenders Mortgage Insurance (LMI) Explained

Posted on Thursday, November 12, 2015 - 14:07

Lenders mortgage insurance is the type of insurance that protects the lender in worse case scenario the borrower is no longer able to make repayments, and a possible sale would not be enough to cover the costs of the loan. At first, you may assume that this means that the borrower cannot take advantage of any benefits.

Still, opting for lenders mortgage insurance will contribute to diminishing the lender’s risk. Thus, the lender can lend an increasingly larger amount of money, even though the borrower is unable to provide at least a 20 percent deposit. Paying for LMI will allow you to get accepted for your loan earlier, instead of paying increasingly higher interest rates or waiting to save more money.

The costs of LMI

When it comes to the costs of LMI, this can vary according to the percentage of the property and the amount of the loan. Another factor that is equally important is the source of your deposited money – whether your deposit embodies your savings or they were a gift, for instance. Thus, a fixed cost cannot be established, as every borrower presents a unique financial situation. Still, it can go up to thousands of dollars.

The LMI is established by the lender. You should know that the LMI policy varies according to each lender. It is non-refundable, and most of the times it must be paid at loan settlement. Still, the LMI can be incorporated into the total of the home loan, which means that the borrower ought to pay higher interest on the loan, thus growing the monthly repayments.

How is LMI determined?

When calculating a borrower’s LMI, it’s significant to establish the Loan to Value Ratio and the sum of money you want to borrow. Your Loan to Value Ratio (LVR) encompasses the percentage of the money you want to borrow in comparison with the exact value of the home. If your LVR is lower than 20 percent, paying for LMI is imminently required.

Let’s take a look at the factors that are taken into account when calculating your LMI:

  • Whether you are self-employed, or you have a stable job.
  • Whether you present a reliable deposit with your lifetime savings or not.
  • Whether your home loan application is for First Home Owner Grant or not.
  • The fact that the property you wish to purchase is occupied or not.

The bottom line is that to determine your LMI and whether it is the right option for you or not, you ought to discuss your financial situation and future plans with a professional.

Is LMI the right option for me?

LMI allows you to be the owner of your dream home, regardless of your small deposit. The Mortgage Choice’s annual Future First Homebuyer Survey indicated that appreciatively 72 percent of potential first home buyers want to purchase their first home within appreciatively two years of entering the market. Still, to obtain a $400,000 loan, a sum of $80,000 should be saved, which can be quite overwhelming. In this view, LMI grows your chances to be accepted for your home loan; some of the times they may even grant up to 95 percent of the value of the house.

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