As the value of homes has steadily increased over the years, more borrowers have turned to Lender’s Mortgage Insurance (LMI) to help get them onto the property ladder.
However, many borrowers are often confused about Lender’s Mortgage Insurance, who and what it actually protects, and what the benefits might be.
Lender’s Mortgage Insurance is a one-off upfront payment applicable when a borrower is unable to provide a 20 percent deposit. LMI can be an incredibly valuable tool if you have the borrowing capacity to purchase a property, but you’re only able to provide a smaller deposit.
Lenders normally like to see a 20 percent deposit because this protects them in the event the value of the property falls, the borrower runs into financial trouble, and defaults on their loan repayments. If a lender had to sell the property, they are taking on more risk if the borrower didn’t have an equity buffer in place.
Advantages of LMI
Buying sooner
The most obvious benefit of paying LMI upfront is that you’re able to get into a home sooner than you would otherwise. When home prices are rising, they are often moving at a faster pace than many people can save. That means you’re getting further and further behind. The sooner you’re able to get into the market, the quicker you’ll stop losing the battle against rising home prices.
A better property
When using LMI you can potentially afford to purchase a better-quality home in a better location, compared to putting down a 20 percent deposit.
Disadvantages of LMI
Cost
The biggest issue for most people who are looking at LMI is the cost. LMI will vary depending on the size of your mortgage, the value of the property, and the location. Typically, LMI costs can run into tens of thousands of dollars. While there is an upfront cost, you have to weigh up those costs against sitting on the sidelines and potentially paying a higher price for your home.
A larger loan
By putting down a smaller deposit, you’re going to have a larger loan. Lenders will assess you based on your ability to service the debt, however, when you use LMI, you’ll be taking on a higher level of debt. And because you have less equity tied up in the property, should property values move against you, there is more risk.
