What is LMI?!
If you have ever applied for a home loan or done any research on getting a home loan, you have probably herd the abbreviation LMI or MI which stands for Lenders Mortgage Insurance.
Lenders mortgage insurance is often misunderstood amongst many as it is usually not explained property in detail. LMI can be thousands of dollars so it is important to understand at least the basics of how it works & how it is calculated.
To explain LMI, it would be best to first explain another abbreviation is the finance industry as the two go hand in hand. That term is LVR. LVR stands for Loan to Value Ratio, which means simply the loan balance VS the value of the property, for example;
If someone has a house worth $500,000 & they owe $400,000 on their home loan, that persons LVR (Loan to Value Ratio) would be 80%.
$400,000 / $500,000 = 0.80 or 80% LVR
When is LMI charged?
LMI is charged when the LVR is greater than 80% or
another way to put it would be to say that LMI is charged when the loan balance is greater than 80% of the properties value.
Now this is true for 95% of situation, there are certain situation wheres this is different but that is outside the scope of this blog.
Does LMI cover the borrower or the lender?
LMI covers the lender/bank/credit union & always has.
Think of LMI as more of a 'risk' fee. Essentially LMI is charged because the loan is seen as more of a risk to the lender. To counteract that risk, the lender has a third party insurance company assess the scenario & insure them in case something were to go wrong. They then pass that insurance fee onto the borrower as it is them that requires the loan.
The main thing to remember is that LMI DOES NOT cover the borrower in any way, the borrower will still need to put their own adequate insurances in place for peace of mind.
How much is LMI & how is it calculated?
This is quite a complex question as LMI is calculated based on the LVR, the size of the loan & the lender, as every lender uses different insurance companies.
The higher the LVR, the more LMI will be.
The bigger the loan amount, the more LMI will be.
If you are wanting an exact calculation on how much LMI will be based on your specific situation, it is best to speak to a broker who can work that out for you.
How do I pay the LMI?
LMI can be paid upfront, as part of your deposit or it can be added to the loan amount. Most people that I meet tend to borrow the LMI on top of their loan as getting the deposit together is usually the hardest part of the process.
How can I avoid paying LMI?
Although LMI is a necessary evil for some borrowers, ideally you want to avoid paying any is possible. As you may have guessed, to avoid paying any LMI, you will need a 20% deposit.
What most people don't realise is that you need the 20% deposit, as well as stamp duty & any other fees that may be applicable.
Buying a home is South Australia for $500,000 you would need $100,000 deposit, as well as around $28,500 for stamp duty & all other fees & charges (Transfer fee, Conveyancer, Council rates, Loan fees).
Purchase price - $500,000
Plus Purchasing costs - $28,500 approx.
Total cost - $528,500
Less depsoit - $100,000 (20%) + $28,500 (Fees)
Loan amount - $400,000 (80% LVR)
The other way you can avoid paying LMI is if you do whats called a guarantor loan. This is a topic for another time but let me know if you would like to know more.
Take home message
All in all, although paying LMI is something to avoid if possible, without it many first home buyers would not be able to enter the property market. Saving a 20% deposit plus fees is a massive task & with LMI, some lenders only require a 5% deposit plus fees.
In my opinion LMI is a necessary evil & we should definitely stop thinking about it as a negative & start to realise how many people it helps get their foot in the door of the property market.
If you have any further questions or would to make an appointment, please fill out the form on this page & I will get back to you ASAP!