Lender mortgage insurance

LENDER MORTGAGE INSURANCE

Lender Mortgage Insurance (LMI) is an insurance policy that some borrower would pay for when they don’t have enough 20% deposit as bank requirements. The purpose of LMI is to protect the lender from financial loss if the borrower defaults on their loan and the sale of the property don’t equal the unpaid amount of the mortgage.

Unlike many people think that the LMI is to protect the borrower in case of loan default, the true purpose of LMI is to reduce the risk to the lender and allow banks or other lenders be able to lend larger amounts and have more loan approval quickly.

When you need to take out LMI to increase your loan amount, you may need to pay upfront or add into your home loan. However, LMI is not refundable, so when you refinance to another lender, you may need to pay a new LMI policy if required.

If your deposit is less than 20% of the assessed value of the property, in other words, your Loan to value ratio (LVR) is more than 80%, then you need to pay for LMI. In general, the actual cost of LMI usually depends on your LVR and amount of money you borrow, for example, the cost is about over $10,000 for a home loan of $500,000.

So the question for many first home buyer is whether to pay LMI or more savings?

There are many debates between first-home buyers about time to enter the property market, as they may hold off on house hunting and spend a few more months or even year to save up a bigger deposit. The answer is totally unique for each home buyers’ situations, but remember the housing market sometimes could be very unpredictable, so it is hard to judge. You have to choose the best option for you.