What is LMI and how can it affect me when purchasing a home?
If you are thinking of building or buying a home in Western Australia, one of the lesser known costs that comes up is Lenders Mortgage Insurance or LMI.
LMI is a type of insurance that protects the bank or lender, not the buyer. You can expect to pay LMI if you plan on borrowing more than 80% of your home’s value. The bank you are borrowing from will organise this insurance so it is not something you have to source yourself.
The amount of LMI that you pay is completely dependent on the value of the property you are considering and how much you have saved for a deposit. If you can save for a bigger deposit, you can reduce the amount you pay on LMI.
How does LMI work?
Essentially LMI is a risk fee that you pay to protect the lender, LMI protects the bank if you default on your mortgage repayments. It is usually a lump sum charged on top of your borrowed amount and added to your overall borrowing. When you have less than 20% of a deposit for your home, the banks consider this a higher risk lend and use LMI to protect the credit they are extending you.
It is important to consider that the deposit you have available may not be the only contributing factor when it comes to the amount you pay on LMI. Other influences may be:
The overall size of your loan
Your property’s location (some locations require higher deposits or even won’t offer LMI at all due to certain risk factors)
Whether the property is for investment or personal use
Your lender’s LMI insurance provider
Government Grants and Schemes
There are several grants your mortgage broker can advise you on that might make getting into your home easier financially. The First Home Guarantee allows you to get into your first home without paying LMI if you are an eligible applicant.
Professional Home Loans
Depending on your profession, you may be eligible to have LMI waived on your mortgage. Doctors, dentists, nurses, accountants and engineers are sometimes eligible for special discounts and loan conditions.
This is because these professions often signal a good employment tenure to banks and present the borrower as a low risk.
Use a Guarantor
A guarantor is someone who uses their own equity to secure your home loan. This person is usually an immediate family member. The equity would just need to be enough to cover that 20% deposit to avoid LMI.
This guarantee is legally binding, which means that if you fail to make your repayments for any reason, your guarantor will become responsible for paying your loan and whatever collateral they have used to guarantee your loan may be required to repay the lender.
Once you have reduced your loan to 80% of the value of your property, your guarantor can be removed and is no longer legally bound to the arrangement. The guarantor will be required to seek legal advice before signing their contracts by most lenders, to ensure they have sufficient understanding of what they are signing.
The terms and conditions and legal implications of the guarantor loan are complex and so speaking with an Allen Finance Mortgage Broker on whether this is a good option for you would be best.
Researching different lenders
Different lenders and banks have varying terms and conditions, there may be an option that reconsiders the option of LMI specific to your situation.
Speak with an Allen Finance Mortgage Broker for support on finding out about the different options for you.
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