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shutterstock_33406525In general, lenders in Australia will allow you to borrow up to 80% of the property’s purchase price, with you paying the remaining 20% as a deposit. There are instances, however, when you may find yourself unable to make the minimum deposit that lenders require for one reason or another. They may thus allow you to borrow up to 95% of the purchase price of the property, or maybe even more. This, however, comes at an extra cost, usually in the form of Lender’s Mortgage Insurance (LMI).

Unlike most forms of insurance wherein the person who buys it receives the benefit payment, the LMI is paid out to the lender in case the borrower defaults on their mortgage repayments. Lenders use this to cover any shortfall between the outstanding balance of the loan and the price at which they have sold the property after the default.

How Much LMI Costs

The cost of LMI varies, and often depends on the lender from which you took out the loan, the cost of the property, and the amount that was loaned to you. Expect though to pay several thousands of dollars for this. In most cases, LMI can be added to the loan amount, which will save you from having to find extra money as well as the deposit on a house. The LMI premium will be added to the loan and included in your monthly repayment.

For this reason alone, it is essential to speak to a mortgage broker as they have access to a variety of different lenders who all charge different amounts for the LMI packages. With the help of a mortgage broker, you could save a significant amount of money on LMI.

When LMI Makes Sense

Due to the cost of the LMI, it is generally more practical to save up for the minimum deposit to avoid paying the LMI altogether. There are, however, instances where paying for the LMI makes more sense to the borrower. People who may benefit from a mortgage with an LMI include low-income earners and people who want to get into the property market as soon as possible.

With the help of LMI, these borrowers will have the chance of owning a home without having to save 20% deposit. It may also be ideal for those who wish to own a property right away without having to wait until they make the requisite minimum deposit amount.

Why Understanding LMI is Important

LMI is an extra cost, and as such, it is important that you understand it before you take out a loan. The most obvious step is to find out how you can avoid paying this insurance (i.e. by saving up for the minimum deposit), but if you do decide to take it out, also find out how it may benefit you (e.g. buy a home sooner).

Since LMI typically varies from lender to lender, using a professional mortgage broker may be necessary. They can discuss your options with you, the costs you have to be aware of, and the products that may be better suited for your lifestyle or personal circumstances.

 Written by Joe Del Borrello