🎅12 Days of B&W Finance - Day 5🎅
Day 5 of our 12 Days of Black and White Finance begins now!
Put on a mug of hot cocoa and kick up your feet as we explain all the ins and outs of Lenders Mortgage Insurance (LMI)!
"On the fifth day of Christmas, Black and White Finance gave to me: Five lenders lending,
- Four guarantors,
- Three construction loans,
- Two different rate options,
- And a head start on my first home"
Is it a bird? Is it a plane? No, it’s LMI!
Let’s begin with explaining what lenders mortgage insurance actually is.
In laymen’s terms, it's a fee that the bank forwards to the borrower when deemed to be of a certain risk, contributing factors could be not having enough of an initial deposit/equity in the property. It also protects the lender in the event that the borrower defaults when they don't meet the repayments.
Usually, most lenders will allow you to borrow up to 80% of the purchase price before charging LMI, however, more recently some lenders have allowed up to 90% (or 95% for first homeowners if the 2020 grant goes ahead which we discussed in day 1).
For example, let’s say you wanted to purchase a property for $500,000 and needed a deposit of 20% to avoid paying LMI, anything less than $100,000 upfront would cause you to pay the fee, even if you had $99,999.99.
99% of the time the premium is added to the loan so you don't actually need to fork all the cash out to pay the premium charged at settlement, you can pay it off over the term of the loan. It will add a slight increase in cost to your monthly repayments but this isn't anything to lose sleep over.
Money, Money, Money!
The cost of paying LMI can differ in each unique situation. Obviously, the more you borrow, the more you can expect to pay for LMI since the lender is taking more of a risk.
We mentioned that the moment you have less than a 20% deposit you must pay lenders mortgage insurance but did you know the cost increases the further you are from that 20% mark?
There is no set price everyone pays.
There are also other contributing factors to the premium you are charged including what your employment status is (If you aren’t full-time you are deemed as high-risk), which state you are purchasing in, which lender you are proceeding with and if you are purchasing as an investment or not.
Want to avoid LMI? Stop buying avocado on toast!
There are actually a number of ways you can avoid paying LMI and making more of a conscious effort to save by cutting out what seems like small luxuries will make a huge difference.
Need help? Don’t be afraid to ask family or close friends for help with your deposit, the worst they can say is no, right?
As we mentioned on day 4, one of the other options open to prospective home-owners is to get a guarantor on your loan. A guarantor can use the equity of their existing home as a security for the property you wish to purchase and as a result, will reduce your loan-to-value ratio (LVR) to below 80% eliminating your need to pay LMI.
Finally, there are some high-profile professions out there that are always in demand. Being a Lawyer, Doctor, Dentist, or even a Vet can get your LMI waived completely so make sure you let your lender/broker know how you make a living (we will cover this in more detail on day 8).
Final Thoughts
There is a lot to consider with LMI, do you wait to save up for a deposit and run the risk of housing prices increasing? Or do you bite the bullet and pay your LMI costs at the risk of higher interest rates?
That being said we do believe housing prices are set to rise in the next year so if you are in the market, now would be a great time to consider purchasing.
There is no clear cut answer that caters to everyone but when you have professional help in the form of a broker, most of the uncertainty is cleared up for you.
Take all this into account and find a strategy that works for you, sometimes the best way forward is in black and white.
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