(Newswire.net — December 10, 2021) —
In October 2021, the average mortgage size in Australia was $570,896. But if you are buying a home, the mortgage is not the only cost you’ll need to consider.
If you are looking to buy a home, you might hear the term LMI or lenders mortgage insurance thrown around. This is a very important concept to understand. Let’s define lenders mortgage insurance, who needs it, and what the cost is.
What Is Lenders Mortgage Insurance?
Lenders mortgage insurance (LMI) helps protect your lender in case you default on your mortgage. If you default, there could be a shortfall, where the proceeds from the sale of the home do not cover the amount you still owe to your lender.
LMI helps protect your lender from losing this amount. The lender may be able to recoup the money through the LMI provider. Unfortunately, the LMI provider might go to you to recover the shortfall amount from you.
Although you pay for lenders mortgage insurance, it doesn’t protect you. It only protects your lender.
It is critical that you do not confuse LMI with mortgage protection insurance. Mortgage protection insurance does help you because it can help you cover your mortgage payments if you become injured or ill and cannot work.
Who Needs Lenders Mortgage Insurance?
The rules surrounding lenders mortgage insurance requirements will be determined by your lender. When you are applying for a home loan, be sure to ask about their specific rules. However, there are some general guidelines about whether you may need LMI or not.
If you have a Loan-to-Value Ratio (LVR) of over 80%, you are considered to be a higher risk to the lender. Most lenders require LMI in this case. These values are based on the lender’s assessment of the property’s market value.
For example, if your home loan deposit is 15% of the lender-assess value, your LVR is 85% and your lender considers the loan risky. Most lenders would require LMI in this case.
The easiest way to avoid lenders mortgage insurance is to put a home loan deposit of at least 20% down. However, there may be other ways to avoid it, such as working with a lender who has specific programs that can help you avoid LMI.
For instance, huntergalloway.com offers home loans for medical professionals. With this program, you can borrow up to 95% of the property’s value without paying LMI. This can be a huge cost saving.
What Is the Cost of Lenders Mortgage Insurance?
The cost of mortgage lenders insurance will vary depending on your LVR, the amount of money you borrow, and your lender. In general, you could spend around 2% of the amount of your home loan on LMI. While this may not sound like a lot, it can easily add up.
Let’s take the example of a home loan of $500,000 with a deposit of $50,000. On top of this amount, you are looking at another $10,000 just for lenders mortgage insurance.
On the plus side, you might be able to claim a tax deduction for home borrowing expenses, including LMI. The cost of mortgage lenders insurance tax deductible amount is usually spread over the term of the loan or five years, which ever is less.
Avoid Lenders Mortgage Insurance
Lenders mortgage insurance can help protect your lender in case you default on your mortgage. But since you pay the premium yet don’t get any benefits, it can save you some money if you can manage to avoid it.
If you found this article helpful be sure to read our other finance articles too.