What is Lenders Mortgage Insurance and How Can it Be Avoided?
Lenders mortgage insurance (LMI) is an added expense that most home buyers can do without, as it typically adds thousands to the cost of the average home loan. But, the good news is you can avoid LMI if you use one of two strategies.
What is LMI?
LMI is an insurance payment that protects your lender against loss should you fail to repay your home loan. You’ll typically pay LMI if you:
Don’t have 20 percent or more as a deposit for your home loan; and
Don’t have a guarantor.
For those of you who don’t know, a home loan guarantor is someone who can repay the amount your lender will lose if you cannot keep up your home loan repayments.
Let’s look at a couple of LMI examples so you can see just how a smaller deposit can add thousands to your home loan costs. Couple 1 and 2 both want to buy a home worth $300,000. Couple 1 have a deposit of $20,000, whereas couple 2 have a $30,000 deposit. This means that couple 1 are borrowing $280,000, whereas couple 2 are borrowing $270,000. The LMI couple 1 will have to pay is $6,440, whereas couple 2 will pay $3,672. But, both couples can avoid LMI if they save $60,000 as a deposit.
How Do I Save a 20 Percent Deposit?
To save a deposit of 20 percent you need to look critically and your current spending habits and work out where you can save. For instance, going out once a week with friends may cost you $100, but if you put this in the bank then you’ll save $5,200 a year towards your home. Over 5-years this adds up to be $26,000.
Smart thinking will also see you save more. Set up a high investment account where you earn higher interest on the money you bank. Then start looking at ways you can deposit money into this account. If you own an expensive car, sell it, buy a cheaper one, and bank the money you saved. Sell all your unwanted items and critically look at your spending habits.
Having a Guarantor
Some lenders will allow you to borrow more with a guarantor’s backing. In most cases, the guarantor is not liable for the whole loan value, so if you default on your home loan payments then you’ll still owe money on the loan.
Some lenders will require a guarantor to secure your home loan with an asset that they own. This asset is then used as collateral to back your loan. If you then default on paying your home loan, the asset can be sold by your lender to recoup their lost value.
Need more information?
If you need further information, get in touch today to discuss your ability to avoid LMI and how we can help you obtain a competitive home loan.