Lenders’ Mortgage Insurance (LMI) is a fee you pay the lender when you borrow more than 80 per cent of the property’s purchase price, which insures the lender in case you cannot meet the repayments. While it is usually recommended that you avoid the LMI by keeping the loan at 80 per cent or lower, this is easier said than done. For example, you may prefer paying the insurance if you want to buy the property sooner rather than waiting years to save up for a deposit. If you’re a property investor, paying the LMI may be a good way to snap up a great investment property before the market picks up.
If you’re left without a choice but to take out a loan with LMI, here are some ways you can save on it:
1. Save up for a bigger deposit.
The LMI varies depending on a number of factors, which includes the loan amount. You can therefore lower your LMI by saving up for a bigger deposit. For example, if you currently have funds to pay a 10% deposit, you may want to wait to save a little bit more cash to, say, a 15% deposit. Although this may slow down the process of purchasing your home, it will save you money.
2.Add the LMI to your overall mortgage.
In general, the LMI is paid upfront and since it costs several thousands of dollars, this is an added expense that the lenders know will take you even longer to save. With this, the lenders allow you to add the LMI to the loan. This is known as “capping the LMI”. The cost of the LMI will be included in the repayments, however this again allows you to get into the property market sooner.
3. Choose your lender carefully.
One of the downsides with LMI is that there are only two LMI providers in the country outside of the banks. Some lenders provide their own lenders mortgage insurance which gives you a bit more flexibility. It is important to choose your lender carefully. While most people simply look at the interest rate when choosing a lender, you must also consider their LMI premium. Your Finance Broker will assist you in sourcing the right lender for your situation, whether you have 5% deposit or 20% deposit to ensure you get the best overall deal.
It is difficult to avoid LMI all together when you don’t have a 20% deposit or a Guarantor, however leaving yourself enough time to save up as much deposit as possible will benefit you overall in all aspects. The cost of LMI varies from lender to lender, so discuss this concern with your Finance Broker who will use their experience and referral network to source you the right lender for your situation.
Written by Duncan Pearce.