Everything an investor needs to know about LMI.
K know some people might be across this already, but I had a few questions about this recently so I thought it might be a good idea to put together some ideas about Lenders Mortgage Insurance, or LMI. What it is, if you need it, if there are risks, and some common questions that you might want to ask.
Firstly, what is Lenders Mortgage Insurance?
Put simply, it is insurance that covers the lender if your mortgage goes belly up. In other words, if for some awful reason you need to default on the loan, the bank is covered.
Generally, if you are borrowing with less than 20% of the purchase amount, your bank will charge a percentage of the loan amount on top of the loan itself to cover this insurance. It is added on to the regular fees and charges associated with the loan.
As the borrower you need to be aware of this addition to your loan. It can be included in your loan amount, as opposed to an up-front fee, but it will increase your repayments, so be aware.
It’s not a silly question, but…
NO, this insurance does not cover you for defaulting on the loan. I know I said it before, but just so you really get it. This insurance is for the lender, not for you! They will work out how much it is, but you have to pay it on top of your loan amount.
If you do have to default on the loan – say you lose your job, there’s, I don’t know, an international disease pandemic (like that would ever happen!) and you need to sell for less than you paid (not very likely in today’s market, international pandemic not withstanding) then this insurance covers the bank for the shortfall on your loan.
The insurance provider will chase you for the rest.
Just so you know.
Different rules apply for each state, and now there are various schemes to help buyers get in to the market, like the First Home Loan Deposit Scheme, which kicked off in January 2020.
This enables first home buyers to borrow with as little as 5% and have their LMI waived. You need to check your eligibility for this scheme, as it depends on a few different criteria.
There are a bunch of other schemes and grants as well for first home buyers, so if this is you, have a look around.
Are there any risks?
There are always risks when buying a property, life is full of them. So do your homework!
If you want to be covered for your loan, then you need to find out about Mortgage Protection Insurance.
It’s easily confused with Lenders Mortgage Insurance, but the titles should give you a hint.
The main thing to be aware of is that when you take out LMI, and include it in your loan amount, it increases the total amount of your loan, and therefore your interest repayments.
Make sure you have dotted all your i’s and crossed your t’s before you sign off on anything. Look around at different products and get good advice from professionals.
Happy house hunting!