Lenders’ Mortgage Insurance or LMI gives people with small deposits the opportunity to buy a property. LMI traditionally applies at 80/20 – where the buyer doesn’t have at least 20% deposit. However LMI does vary by lender and loan type and a broker can give you this information.
LMI does make home purchasing more expensive, however it can be added to the overall your home loan so it doesn’t need to be paid upfront. It’s also important to know that it doesn’t protect you if you default and can’t repay your loan; it protects your lender.
I think LMI is like fire; it can work for or against you. Yes, it will help you get into the market faster than if you took the additional time to save a 20% deposit, but without a little planning and analysis you could end up paying much more than you really need to.
To demonstrate for you how easy it is to fall into the LMI fire pit, I have shown three calculations for the same purchase price to show how even subtle differences in the deposit amount can have a big effect on the cost of LMI, based on the 80/20 scenario.
Scenario 1: Loan amount $600,000 purchase price $670,000
• Deposit $70,000
• LMI Premium $12,629
• Total loan amount $612,629
Note: This type of LMI scenario is not uncommon these days with high property prices, especially in capital cities.
Scenario 2: Loan amount $600,001 purchase price $670,000
• Deposit $69,999
• LMI Premium $14,436
• Total loan amount $614,437
Note: In this case just by contributing $1 less deposit the LMI premium has increased by $1,807!
Scenario 3: Loan amount $603,050 purchase price $670,000
• Deposit $66,950
• LMI Premium $23,662
• Total loan amount $626,712
Note: This is an extreme example. In this case just by contributing $3,050 less deposit the LMI premium has increased by $11,003!
The moral of the story…
Ask your broker or lender if you are close to any of the ‘tiers’ that are used to calculate the LMI. In Scenario 2 the tier was in relation to the loan amount being greater than $600 000. In Scenario 3 the tier was the loan to value ratio or ‘LVR’ creeping just over 90%. LMI can be complex and confusing, so seek information from an MFAA accredited broker or your lender.
Did you need lenders’ mortgage insurance? How did you save money, or did you overpay? Share your experience with us.
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