LMI, Lenders Mortgage Insurance, is generally seen as a financial vehicle to protect the lender. That is correct, but it has excellent value for first time home buyers too!
Just to be clear, we are not talking about mortgage protection insurance.
What Is The Purpose Of Lenders Mortgage Insurance?
If you, the home buyer, reach a state of default on the home mortgage, the insurance kicks in to protect the lender. It’s a typical finance vehicle in the home mortgage industry and is very relevant to purchases where the new buyers cannot get a deposit nor a guarantor together. You are then offered the option to service the LMI additional fee, especially if the loan is > 80% of the purchase price.
As the property is not seen as solid security against the loan amount, the LMI is the contingency plan. The property is not reliable security as no-one can guarantee market values on any item into the future.
The fee is calculated on the loan value and property value and is paid once upfront or it can be capitalised and become part of monthly instalments. Each LMI is specific to the loan against which it was set up. Any new loans may require their own LMI.
How do they determine the LMI cost?
The Loan to Value Ratio (LVR), is a term used to express the ratio of a loan to the value of the asset for which the loan will be used.
When it comes to home loans, the LVR is the home loan or investment loan amount divided by the value of your property. A Loan to Valuation Ratio calculator will help determine whether your home loan needs to be covered by Lenders’ Mortgage Insurance (LMI).
Benefits For The Home Buyer
The LMI facilitates a sooner purchase of a property as you don’t have to establish a guarantor or spend years saving a bigger deposit.
As a home buyer, you are placed into different risk categories by underwriters. If you cannot pro-vide cash for 20% (of the loan amount) deposit, you are deemed ‘high-risk’. For example, for your $700,000 home, 20% equals $140,000. LMI buys time and lets you enter the market sooner, which means your property portfolio value starts escalating sooner.
More than anything, LMI helps a dream come true for first time home buyers earlier in life.
Having a deposit is so important. If you need a savings plan, we can help you sort out your priori-ties and timetable.
If you need any additional information not covered here, contact us today. We have the depth and breadth of expertise and experience to help you make your dreams come true earlier.