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Loan Mortgage Insurance Explained

Lenders Mortgage Insurance (LMI)

This is required whenever your deposit is less than 20% of your home’s value. For some people, this is a cost to avoid and for other, this isn’t so bad…


Let’s weigh up the pros and cons of this:


Pros 😃

-You can still purchase a property and not have to put down a 20% deposit, which in some states, is quite a lot.

-Using LMI, you can get into a property sooner, rather than waiting another year or two whilst saving. In a rising market, your property could increase in value more than you could save…think about that.

-Most banks will allow you to leverage up to 95% LVR – So you only need to contribute a 5% deposit.


Cons 🚫

-LMI protects the bank and not you if the loan is defaulted on.

-Trying to avoid it could result in an opportunity loss. See point 2 of pros.

-It does get capitalised to the loan, which means you’re paying interest on that premium


Still confused? Let's put this into an example!

Say you’re buying a $500,000 home and have just a $50,000 deposit, you may need to pay an LMI premium of around $8,800.


You need to ask yourself: Do I wait to buy until I’ve saved that extra $50,000 (in the above example) or cop the bill for $8,800? The premium is a once-off for the life of that loan, and of course, once your equity tops 20% (through either debt reduction or capital gain) you can shop for another loan without LMI.


So, Is it better to pay LMI, or to wait until I have a larger deposit?


This is a question that depends on your situation is right now.


To work out what your options are, and to get the information you need to make a well-informed choice, it is best to speak to a Mortgage Broker. Your Broker will explore your options with you and give you a clear picture of the paths you can choose moving forwards.


In our opinion, LMI is a case of minimal pain for long term gain. Handing over less of your savings frees up your future equity, giving you more ways to use your money to make money. We'd advise you seek professional advice from a good Mortgage Broker!


If you don’t have a mortgage broker or are looking for a second opinion, please feel free to call on 0417 292 780 or email morgan@fullcirclefinance.com.au




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