How to Avoid Lenders Mortgage Insurance
If you need to borrow above 80% of the value of your property, lenders mortgage insurance (LMI) is generally required. In basic terms, when a lender considers a loan to carry a high risk, it is likely that they want some way to offset that risk, and LMI is one way to achieve that.
So what is lenders mortgage insurance?
Lenders mortgage insurance is a premium the borrower pays to insure the lender against any potential losses in a high loan to value ratio scenario. If, for example, you purchase a property with a loan of over 80% of the value of the property and fail to make the repayments, the lender is forced to sell the property and they may not be able to recoup all of their costs. Lenders mortgage insurance insures the lender against that loss.
What can you do to avoid paying lenders mortgage insurance?
If you are able to contribute at least a 20% deposit you can avoid paying lenders mortgage insurance. Increasing your savings is one way to do that. It may mean looking over your budget and seeing where you can make extra cuts, or perhaps looking to increase your income, be it from a second job or one with a higher salary. You may even be able to boost your deposit by selling unwanted items. There is also the option of someone gifting you funds to go towards your deposit. One important thing to know here is that some forms of boosting your deposit are not acceptable to some lenders so it is wise to consult your mortgage broker to see what is going to be the most effective way for you grow your available funds.
If someone is able to help put some extra security up for you as a guarantee, that can help you avoid LMI. Normally an acceptable guarantor is a parent or close relative with equity in their home that they are willing and able to put up as security. The lender would generally take a limited guarantee over this property - although in some cases it can be a full guarantee - and then ideally you will build up enough equity in your own property to be able to remove the guarantee. This can be either by reducing the loan principal or an increase in the value of your home.
For certain professions, some lenders will offer a 90% loan with no LMI. This is particularly so for medical professionals, but there are some lenders that will consider other professions as long as they meet their requirements around qualifications and income. It is a good idea to check with your broker to see if your occupation meets this criteria.
While LMI is in place to protect the lender from loss, it can still benefit the borrower. It may be the difference in you securing a property or not, as it allows lenders to comfortably lend higher percentages of the value of the property. If none of the above solutions are available to you, lenders mortgage insurance may be a necessary evil.
For more information on how to avoid lenders mortgage insurance or to find out what it will cost you, contact us.