If you are in the home loan market you might have come across a few phrases that leave you wondering “what does that mean?” unfortunately in such instances, ignorance is not bliss. Not knowing what a term means can have financial repercussions. It pays to ask. Research suggests that 40% of home loan borrowers have no idea what Lender’s Mortgage Insurance (LMI) means and we are here to help clear things up for you.
What is Lender’s Mortgage Insurance?
When it comes to buying a house the general rule of thumb is that you need to have 20% of the deposit ready to pay towards a loan. However, if you haven’t been able to save up for a 20% deposit but want to close in on a property that could soon go off the market Lender’s Mortgage Insurance will come into play (LMI). It is a condition that is compulsory for all borrowers who do not have the 20% deposit but want to purchase a house. LMI is designed to protect the lender in the event where you (the borrower) are unable to meet the home loan repayments after signing the loan agreement.
How does it work?
Should a borrower fail to meet the monthly repayments on the loan that they have taken out from the lender, LMI will kick in which protects the lender from such events. The lender will be able to make a claim if a borrower defaults on a loan. LMI allows the protective barrier that lenders need to borrow out larger amounts to people who do not have a 20% deposit ready. When you apply for a home loan LMI is already applied to the loan, so you do not have to worry about an up front fee. It is important that you read the terms that are included in a policy to get a clearer picture of how LMI will affect you.
The cost of Lender’s Mortgage Insurance will differ
There is no set amount that is applied to loans that come with a Lender’s Mortgage Insurance attached to it. This will differ depending on various factors such as; the size of the loan, how much of the deposit you have ready, the type of property it is, and your employment status to list a few. However, if you are planning on borrowing 95% of the properties value from a lender you should reconsider as this will be a greater risk to you financially. The lower the amount of the deposit you have to offer up front, the higher the LMI on your loan can be pushed up. This could create financial stress when it comes to repaying the loan.
You will be better off waiting to have an adequate deposit ready than to rush into getting a mortgage that will have you paying through your nose.
Can I get a refund on my premium if I pay the loan off early?
This will vary from lender to lender. However, it will most likely be based on your circumstances. A partial refund can be applied on a case by case basis and can be available in the first 1-2 years.
What if I am no longer able to meet my mortgage repayments?
You will have to contact your lender immediately. The sooner you do this the easier it will be for both you and your lender to find a repayment plan that will work for your current situation. Some lenders will waive the premiums and till you are financially stable, but this can only be done if they are told in advance.