There are many things to consider before purchasing a new property. Besides the investment requiring a chunk of the deposit before release, the move may also cause more problems for an investor without having a good amount of money saved in their bank.
Although good things come to those who wait, the same rules do not apply in Australia. Buying a property in the country is more about the early bird catching the worm. Investors who choose to pay early on will save more money than manage the lenders’ mortgage insurance. But what is the Lender’s Mortgage Insurance? Here are some facts.
1. Protects the Lender, Not the Borrower
A lender’s mortgage insurance is a one-off payment made during the time of loan settlement. Used as protection, it prevents borrowers from borrowing beyond the 80 per cent threshold of the value of the home in question. The insurance policy protects lenders from shortfall or insufficient payment when the sale of the property isn’t enough to cover the balance left by the borrower to the lender.
2. LMI May Be Required or Not
The lender’s mortgage insurance may kick in, depending on the current situation between the lender and the borrower. If the loan deposit the borrower makes is below 20 per cent of the property’s assessed value, the borrower may need to pay off the amount to the lender to secure the deal. As mentioned above, the policy safeguards the lender if a specific borrower asks for more than 80 per cent of the assessed amount.
3. Loan-to-Value Ratio Dependent
The loan-to-value ratio is how lenders measure the amount a borrower needs to buy a specific property. It’s calculated as a percentage of the assessed value of the lender.
For example, if the assessed value is at 500,000 AUD and the deposit is at 100,000 AUD, the amount you need to purchase the property is 400,000 AUD. Therefore, the amount required over the total amount of the property should be equal to the LVR ratio. Based on the example, that equals 80 per cent.
4. The Lower LVR, the Better
A lower loan-to-value ratio only means good news for the lenders. It signifies that the borrower is considered a low-risk client, with which they will not have too many issues in the future. Also, a lower LVR is a great headstart for owning the home, providing the borrower more equity to the property in the long run.
5. Eighty Percent is the Magic Number
Lenders consider borrowers with over 80 per cent LVR tipping point. Meanwhile, the higher LVR rate may mean more costs in acquiring a home loan. There’s no running away from LMI as financial institutions designed it to take care of the lenders in the first place.
For people who plan on acquiring a home loan in the future, it pays to understand how lenders can leverage over your deals by understanding the basics of LMI. Although it’s good to borrow money to invest in properties and businesses, knowing the risks is vital before signing the dotted line. Keep in mind that there will always be upfront costs and fees when buying a house. Make sure to consider these expenses when saving up for a home deposit to ensure no penalties will take place and get more money out of your savings.
Wealthy You is a commercial lending company in Sydney. We offer alternative business funding for our clients wanting to start fresh and invest in a business they would like to try and do. We also provide home loans, even for people with a bad credit history. Reach out to us today by scheduling an appointment through our website!