The cost of getting into the housing market can be expensive, especially if you don’t have a big deposit saved up. But there is a way to help reduce some of those costs — lender mortgage insurance (LMI). This is free banks and credit unions charge borrowers when they are considered high risk. Usually, this is when the deposit amount is less than 20 per cent of the property value.
Usually, LMI is charged upfront during the application process. However, it could be added to the final sale price of the property once it is sold. So how much does it cost? Well, depending on the bank or financial institution, the monthly fee ranges from $10 to $20.
Here’s more information on lenders’ mortgage insurance (LMI) provided by Finance Valley who is a leading Mortgage Broker in Australia:
• Lenders’ mortgage insurance (LMI) is usually paid by the buyer at the time of property settlement.
• Lender’s mortgage insurances (LMI) are usually required for loans over 80 per cent of the property’s purchase price. For example, if the property cost $500,000 and the loan is $400,000, the LMI would be $10 per month.
• If you’re buying a property worth under $150,000, you won’t pay anything towards the lenders’ mortgage insurance (LMI), even though you might still need to put down a larger deposit.
• Borrowers who want to borrow more than 80 per cent of the value of the property must pay the lender’s mortgage insurance (LMI) upfront.
How does it work?
Technically, the borrower pays off the LMI payment in full at settlement. However, most lenders will offer to finance the LMI into your home loans, so that it is included in your monthly mortgage payments. This means you don’t need to have the money upfront, but it also increases the cost of borrowing, as your monthly repayments are now higher.
Lenders require this type of mortgage protection insurance when a borrower has either a low deposit or no deposit at all. They do this because the risk of the buyer defaulting on their loan and selling the house for less than the outstanding balance is much greater than it would be if the buyer had a large deposit.
Taking out the insurance allows lenders to make an insurance claim against the insurer if the buyer defies on the loan and the house sells for less than the outstanding debt. The shortfall is the difference between the sale price of the property and the outstanding loan. If the shortfall is $100,000, the lender may seek to recoup $100,000 from the insurer, meaning the borrower must pay back the remaining $1 million.
When do I need to pay LMI?
Each financial institution will have a slight difference in how it treats mortgages where the buyer deposits less than 20 per cent of the property value. However, most lenders will require buyers to pay LMI if their deposit is less than this amount.
The LMI premium is usually calculated based on the size of the loan, the borrower’s credit rating and the interest rates being offered. For example, if a lender offers a fixed 4.5 per cent interest rate over 25 years, the LMI premium will be around 0.75 per cent. This means that if the buyer puts down $100,000, the total cost of borrowing will be about $125,000.
If the buyer deposits $50,000, however, the total cost of financing will be just $105,000 – meaning the buyer will save $20,000.
Buyers are typically required to pay LMI if the deposit is less than 20 per cent. However, some lenders will allow buyers to borrow up to 30 per cent without paying LMI. Lenders will often offer discounts on LMI premiums if borrowers put down larger amounts of money.
For example, if the buyer deposits $150,000, the total amount borrowed will be $165,000. If the buyer pays 10 per cent LMI, the total cost of lending will be $170,500. This means that the buyer will save $15,500 compared to putting down $150,000.
How much does LMI cost?
Loan Modification Index (LMI), also known as Loan Modification Fee, is a fee charged by lenders to modify mortgages. This fee varies depending on the type of loan modification and the lender. In addition, it varies based on the amount of money being modified.
Unfortunately, there’s no simple way to calculate the exact cost of LMI because each LMI provider calculates it slightly differently. However, you can use our mortgage calculator to give you a rough estimate of what you might spend.
Here are some of the most important factors that determine the price of LMI:
• Amount of principal paid off. If you’re paying off less than 80% of the total value of your home, you’ll likely pay less than $1,500 per month.
• Number of payments remaining. The longer you make your monthly payment, the lower the LMI will be. For example, if you have 30 months left on your mortgage, you could end up paying about $3,300.
• Home equity. You’ll pay more for an LMI if you have a large amount of equity in your property. For example, if your house is worth $200,000 and you owe $150,000, the LMI will be around $1,800.
• Rate. The interest rate determines how much you’ll pay for the LMI. A lower interest rate usually translates into a lower LMI.
1. The size of the loan
The amount of money you borrow influences how much interest you pay. If you’re borrowing $10,000, the lender will charge you 10 per cent per annum, while the same loan worth $100,000 will cost the bank 12 per cent annually. This means that the lender faces a bigger risk if you fail to repay the loan.
So what happens if you don’t make payments? In most cases, lenders are entitled to take possession of your property and sell it off to recoup some of their losses. However, the process takes time and involves legal fees. So there’s a good chance that the lender will end up selling the collateral at a lower price than originally agreed upon, meaning that you’ll owe even more.
2. The size of your deposit
The biggest mistake people make is putting too little money down. If you put less than 5%, you’ll have to pay lender mortgage insurance (LMI), and this could delay your plans. But even if you put 10% down, there are still some things you should know about paying LMI.
3. Whether you’re buying for investment
The question of whether you should buy a home to live in versus one you intend to rent out is often asked by people looking to invest in real estate. But there are three important factors to consider when making such a decision.
First, it depends on what type of investment you want to make. If you plan on renting out your property, you’ll likely pay more per month in maintenance costs than someone who rents out a house they live in. Second, how long do you plan on staying in the home? Will you be living there for less than five years, or longer? Third, where are you planning to live? A city like Australia offers many advantages over suburbia, but those who choose to live in the suburbs will save money on taxes and utilities.
4. Your employment status
LMI providers often ask about your employment status because it helps determine how much you’re willing to pay. If you’re employed full-time, you might be able to afford to work part-time and still make ends meet. But if you’re self-employed or unemployed, you’ll probably want to negotiate lower rates. In either case, you’ll likely need to provide proof of income.
Can I avoid paying LMI?
LMI stands for Last Mile Investment, and it refers to the cost associated with getting online retailers into brick-and-mortar stores. This includes everything from building out the infrastructure required to support an eCommerce site, to buying inventory and hiring employees. There are many different types of LMI costs, including:
– Building out the technology needed to run an e-commerce site;
– Hiring employees to manage the storefront;
– Buying inventory;
– Paying rent;
– Purchasing marketing materials;
– And much more.
The good news is that you don’t necessarily have to pay LMI upfront. In fact, most merchants start off with very little money and work their way up over time. But even once you’ve paid down some of those initial expenses, you’ll still have ongoing costs like maintenance fees, taxes, and employee salaries.
1. Save more
If you’re thinking about buying a home, it might be worth considering putting aside some money now rather than later.
That way, you’ll be able to save up enough cash to cover the full cost of the house without having to pay Lender Mortgage Insurance (LMI). This is because most banks only require LMI if your deposit isn’t more than 20% of the total property purchase price.
So, while there are no guarantees, here are four ways to make sure you don’t end up paying LMI. Firstly, you can avoid paying by saving for a bigger down payment.
According to MoneySmart, the average deposit needed to buy a $500k property in Australia is around 10%. But if you want to avoid LMI altogether, you could put away 20% of the property’s purchase price.
2. Ask for help
Price before a fall, right?! You’ve worked hard to earn money, save it up, and now you’re ready to buy that dream home. But saving for a down payment isn’t easy, and there’s no shame in asking for help. In fact, your parents might be willing to lend you some cash.
3. Get a guarantor
The bank won’t lend you money unless you’ve got something up front to put down. If you’re buying a house, it’s called “Lender Mortgage Insurance”, or LMI. You’ll pay a small amount each month for five to seven years. But there’s a catch – you have to borrow enough to cover the whole cost of the home plus a little extra. And the lender needs to know how much equity you’ve got in the property. So what do you do?
You could try and convince someone else to buy part of the house and become your guarantor. They’d agree to put up some of their own money as surety, reducing your debt level. Or you might go online and find a guarantor. These days, most banks don’t even require one. Banks say that if you’ve been able to save up $10,000, you’re probably safe from needing one.
But if you haven’t saved anything, you may want to think about getting one anyway. A guarantor takes on some of the risks if things go wrong. If you default on your mortgage payments, your guarantor gets stuck with the bill.
4. Consider disclosing your occupation
The lending industry is one where it pays to be careful about what information you disclose. There are many factors that influence whether lenders will extend credit to someone, including income level, employment status, age and even the type of profession you work in.
Generally speaking, LMI providers are much more likely to lend money to doctors, dentists and lawyers than they are people working in high-risk industries. This is because doctors, dentists and attorneys are consistently in high demand, and are also usually well paid.
People working in these well-respected professions are therefore generally viewed as low-risk borrowers, and consequently are often given access to cheaper loans. If you are a doctor, dentist or lawyer, make sure that your lender knows, and asks them to waive your LMO premiums. Some might be happy to do this.
Is it better to pay LMI or save more?
The choice to delay buying a house isn’t one that many people make lightly – particularly those looking to buy a property without putting down a significant amount of money upfront.
But there are times when you might want to hold off making a decision about whether or not to put down a larger deposit.
For different types of loans in Australia such as Home Loans, Home Equity Loans, Finance Brokers, and Refinance Mortgage Brokers, you can contact Finance Valley. Their dedicated team provides you with all the information you need regarding your inquiries.