LMI (short for lenders mortgage insurance) is a type of insurance that home loan borrowers must take out if they borrow more than 80 percent of the property value. The insurance protects the lender and even the best mortgage brokers if the borrower cannot repay the loan.
LMI can be a costly addition to your home loan, so it's important to factor it into your budgeting when considering how much you can afford to borrow. Here are some misconceptions we must unravel to get the most out of this policy:
Misconception #1: LMI Is Protection
An insurance policy is a document agreed upon between you and an insurance company. You agree to pay premiums, and the company agrees to pay claims in the event of an incident. On the other hand, LMI is insurance that protects your lender if you default on your home loan. If you default and your home needs to be sold to cover the mortgage, the insurer will ensure the lender gets paid. You could still be responsible for any remaining balance, but the LMI will reassure your lender that they won’t take a big risk.
Misconception #2: Just Like Regular Insurance, a Bigger Policy Is Better
Some home buyers think that having LMI will protect them somehow, so they make the mistake of getting it even when they have a loan deposit that meets the 20 percent requirement. One only needs to buy LMI if one borrows more than 80 percent of the property's value. Borrowers should avoid pushing their budget to buy a more expensive home and pay for LMI. This can add thousands of dollars to the loan amount and make even the best mortgage brokers flinch.
Misconception #3: The Premium Is Always Refundable
The LMI fee is not refundable in most cases, but there are some exceptions where you might be able to get a partial refund. For example, if you can repay your loan in full during the first or second year, you may be eligible for a refund. However, this will depend on your discussion with your lender and the insurer. Additionally, you may be able to get a refund if the LMI policy is cancelled within the first 12 months of the loan.
Misconception #4: An LMI Is the Only Option I Have
You may skip paying an LMI if you can find a loan guarantor, which is a person who agrees to cover your repayments in the event you are unable to make them. This option can make your loan more affordable and help you avoid paying LMI.
A security guarantor on your home loan is an option that many first-time home buyers often overlook. A family member or friend can offer the equity in their property as security for your loan, which can help you reach the 80 percent loan-to-value ratio (LVR) required to avoid buying LMI.
However, the guarantor should be aware of this offer's consequences, as they would be responsible for the balance of your home loan if you default.
This arrangement may also make it more difficult for the guarantor to use their equity for other reasons, so it's important to consult with a broker first to ensure that it's the best decision for all involved.
Don’t just base your decision on what family and friends have mentioned. If you want to learn about LMI and other mortgage options you have, contact Wealthy You today. We have the best mortgage brokers serving the Sydney area for nearly ten years, with the experience to provide various solutions according to your budget. Contact us via our website today!