Are you considering buying a home? If so, you've probably heard the term "Lenders Mortgage Insurance" or LMI thrown around. Don't let this financial jargon intimidate you. In this blog, we'll break down Lenders Mortgage Insurance into simple terms so you can understand what it is and how it may affect your home buying journey.
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance, commonly referred to as LMI, is a financial safety net designed to protect lenders when borrowers make a smaller-than-typical down payment when buying a home. In Australia, it's a key component in the property market, and its primary purpose is to reduce the risk lenders take on when granting home loans with lower deposits.
Why is LMI Required?
When you buy a home, you usually aim to contribute a significant deposit. In Australia, a 20% deposit is considered standard. However, not everyone can afford such a substantial upfront cost, or they may not want to wait as long as it will take to save this amount. LMI comes into play when a borrower's deposit is less than 20% of the property's purchase price. This insurance shields the lender in case you, the borrower, default on your mortgage payments.
How Does LMI Benefit You?
While LMI is designed to protect the lender, it can also benefit you, the borrower. It allows you to enter the property market with a smaller deposit, making homeownership more accessible. By using LMI, you can purchase a home sooner rather than waiting until you've saved a 20% deposit, which can take years. This can be particularly advantageous if property prices are rising, as you can get a foothold in the market before prices increase even further.
How is LMI Calculated and Paid?
The cost of LMI varies depending on several factors, including the loan amount and the loan-to-valuation ratio (LVR), which is the percentage of the property's value covered by the loan. LMI can typically be paid as a one-time premium, added to the loan amount, which means you'll pay it off over the life of your mortgage.
How to avoid LMI
One way to avoid LMI is to save up a 20% deposit for your home purchase. However, this might not be feasible for everyone. Other ways to avoid LMI may include:
1. Take advantage of the First Home Guarantee - Under the FHBG, part of an eligible home buyer’s home loan from a Participating Lender is guaranteed by Housing Australia. This enables an eligible home buyer to buy a home with as little as 5% deposit without paying Lenders Mortgage Insurance. Contact us for more information.
2. A handful of lenders will lend up to 85% of the purchase price without LMI. This means you may be able to get into your property with a 15% deposit and no LMI. Contact us to find out how.
3. Keystart - low deposit home loans (WA only). Keystart is a transitional lender, with low deposit requirements (generally 2% of the purchase price) and no LMI. They do have some strict criteria, particularly around property purchase price and income thresholds, so contact us to find out if you a eligible.
4. Industry Professionals. Some industry professionals, such as medical professionals and lawyers may be eligible to borrow up to 90% of the property purchase price, with no LMI, through special offerings by certain banks and lenders. To find our if you qualify, contact us.
5. Parental Guarantees. This is where your parent gives the bank a limited guarantee over their property in place of your deposit. The guarantee covers the security deposit portion of the loan - usually 25-25% of the purchase price. Once you have built up enough equity in your property, or have paid down the loan sufficiently, you can then refinance your loan to remove your parents as guarantors. A handful of banks offer this type of loan, with differing terms and conditions, so to see if you qualify, contact us.
In conclusion, Lenders Mortgage Insurance (LMI) is a tool that helps Australians achieve their dreams of homeownership by reducing the barriers of entry into the property market. While it's an additional cost, it can be a stepping stone to securing your own piece of real estate without waiting years to accumulate a substantial down payment. When used wisely, LMI can be a valuable resource for anyone looking to buy a home in Australia. So, don't let LMI intimidate you; consider it a helping hand on your path to property ownership.
Lenders Mortgage Insurance, commonly referred to as LMI, is a financial safety net designed to protect lenders when borrowers make a smaller-than-typical down payment when buying a home. In Australia, it's a key component in the property market, and its primary purpose is to reduce the risk lenders take on when granting home loans with lower deposits.
Why is LMI Required?
When you buy a home, you usually aim to contribute a significant deposit. In Australia, a 20% deposit is considered standard. However, not everyone can afford such a substantial upfront cost, or they may not want to wait as long as it will take to save this amount. LMI comes into play when a borrower's deposit is less than 20% of the property's purchase price. This insurance shields the lender in case you, the borrower, default on your mortgage payments.
How Does LMI Benefit You?
While LMI is designed to protect the lender, it can also benefit you, the borrower. It allows you to enter the property market with a smaller deposit, making homeownership more accessible. By using LMI, you can purchase a home sooner rather than waiting until you've saved a 20% deposit, which can take years. This can be particularly advantageous if property prices are rising, as you can get a foothold in the market before prices increase even further.
How is LMI Calculated and Paid?
The cost of LMI varies depending on several factors, including the loan amount and the loan-to-valuation ratio (LVR), which is the percentage of the property's value covered by the loan. LMI can typically be paid as a one-time premium, added to the loan amount, which means you'll pay it off over the life of your mortgage.
How to avoid LMI
One way to avoid LMI is to save up a 20% deposit for your home purchase. However, this might not be feasible for everyone. Other ways to avoid LMI may include:
1. Take advantage of the First Home Guarantee - Under the FHBG, part of an eligible home buyer’s home loan from a Participating Lender is guaranteed by Housing Australia. This enables an eligible home buyer to buy a home with as little as 5% deposit without paying Lenders Mortgage Insurance. Contact us for more information.
2. A handful of lenders will lend up to 85% of the purchase price without LMI. This means you may be able to get into your property with a 15% deposit and no LMI. Contact us to find out how.
3. Keystart - low deposit home loans (WA only). Keystart is a transitional lender, with low deposit requirements (generally 2% of the purchase price) and no LMI. They do have some strict criteria, particularly around property purchase price and income thresholds, so contact us to find out if you a eligible.
4. Industry Professionals. Some industry professionals, such as medical professionals and lawyers may be eligible to borrow up to 90% of the property purchase price, with no LMI, through special offerings by certain banks and lenders. To find our if you qualify, contact us.
5. Parental Guarantees. This is where your parent gives the bank a limited guarantee over their property in place of your deposit. The guarantee covers the security deposit portion of the loan - usually 25-25% of the purchase price. Once you have built up enough equity in your property, or have paid down the loan sufficiently, you can then refinance your loan to remove your parents as guarantors. A handful of banks offer this type of loan, with differing terms and conditions, so to see if you qualify, contact us.
In conclusion, Lenders Mortgage Insurance (LMI) is a tool that helps Australians achieve their dreams of homeownership by reducing the barriers of entry into the property market. While it's an additional cost, it can be a stepping stone to securing your own piece of real estate without waiting years to accumulate a substantial down payment. When used wisely, LMI can be a valuable resource for anyone looking to buy a home in Australia. So, don't let LMI intimidate you; consider it a helping hand on your path to property ownership.
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