If you’re a first home buyer going through the rounds of a home loan comparison, you’ve likely come across a requirement for lender mortgage insurance and asked yourself, what exactly is this insurance and its purpose?
Buyers with less than 20% deposit for their property are considered to be a higher risk of default by the banks, so to put Lender Mortgage Insurance (LMI) simply- you are paying for an insurance that protects the bank from any loss should you default on the property.
So to the disappointment of many, LMI does not protect the borrower from any losses. If you are looking for an insurance that will pay your mortgage, if for some unfortunate reason you are not financially able to maybe due to illness or losing your job, you are looking for mortgage protection insurance and you have come to the wrong blog, please close the door on your way out.
But for those who are eager to own the roof over their head or get a foot on the property ladder but don’t have a large deposit to get you started, LMI may be for you, so please keep reading.
What’s the cost of mortgage insurance?
The first time I heard of LMI, I presumed it was going to be a massive cost on top of the loan but I have found that the value of this insurance is in the eye of the beholder.
According to our Home Loan experts, mortgage insurance can cost between 2-3% of the loan value, so for an average $400,000 loan with an LVR around 90% you would be looking at paying almost $8,000 – $10,000 on Lenders Mortgage Insurance. This payment can usually be paid upfront or capitalised into bite sized payments incorporated into your mortgage repayments. While no one is likely to throw away $10,000 some may think this a minor cost to getting an early start on owning a property.
Are there ways around mortgage insurance?
Sorry, aside from the rare case of a ‘special’ doctor or lawyer, there is no way of jumping over LMI, apart from having a full 20% or more deposit, according to our home loan experts.
What are the drawbacks to mortgage insurance?
Now that exit fees have been banned for borrowers wanting to swap lenders, the only major hurdle that now stands in the way should you decide to change home loan is your mortgage insurance. Of course this only stands if your home loan still above 80% of the properties value. If you still own less than 20%, it is not usually possible to carry over the insurance to your new loan. This means if you switch loans you will have to purchase mortgage insurance again, not something our home loan experts recommend. However some lenders may offer a refund, varying on the length of ownership on the insurance but this will vary with different banks.
So should I take Leders Mortgage Insurance?
rather the better question might be should I consider purchasing a property with a modest deposit. There is of course a higher degree of risk, not directly from the insurance but by owning less of your home you will have higher interest repayments and for a longer time. After all, this is why the banks require insurance on your loan in the first place. But as long as you’re are honest with yourself on what you can afford and plan wisely, LMI can help you get a head start.
And if you decide to stick at it and save that 20% deposit, make sure you’ve got your money working as hard as it can in a high interest savings account.
Have a thought on Lenders Mortgage Insurance or want to share some advice? Leave a comment below and lets chat.