If you're considering refinancing your home loan in Australia, you may be wondering if you'll have to pay Lenders' Mortgage Insurance (LMI) twice. LMI is a type of insurance that protects lenders in the event that you default on your loan.
While it's not required by law, most lenders will require you to pay LMI if you're borrowing more than 80% of the property's value. So, if you're thinking of refinancing to access equity in your home, you'll likely have to pay LMI again.
If you're not sure whether you'll have to pay LMI or not, it's best to speak to a mortgage broker or lender. They'll be able to help you understand your options and find a loan that's right for you.
What is Loan-to-Value Ratio?
Loan-to-value ratio (LVR) is the percentage of a property's value that you're borrowing. It's calculated by dividing the loan amount by the property's value. For example, if you're buying a property worth $500,000 and you're taking out a loan for $400,000, your LVR would be 80%. LVR is used by lenders to assess the risk of a loan.
The higher the LVR, the higher the risk for the lender. This is because there's a greater chance that you'll default on the loan if the property's value decreases. Most lenders have a maximum LVR that they'll lend to. For example, a lender may only lend up to 80% LVR. This means that if you're borrowing more than 80% of the property's value, you'll need to pay LMI.
How to Lower Your LVR to Avoid Paying LMI Twice
There are a few ways to lower your loan-to-value ratio and avoid having to pay LMI twice. You could:
1. Save Up a Larger Deposit
The best way to avoid paying LMI twice is to save up a larger deposit. This will lower your loan-to-value ratio. For example, if you're borrowing $400,000 and you have a deposit of $100,000, then your LVR is 80%. However, if you save up $50,000 more, then your LVR will be 60%. Even if your property's value decreases, you'll still have a high chance of being able to make your loan repayments.
2. Find a Lender That Has a Higher LVR Limit
Some lenders have higher LVR limits than others. For example, if you're borrowing $400,000 and you have a deposit of $100,000, then your LVR is 80%. However, if you choose a lender with a 90% LVR limit, then you can avoid paying LMI.
3. Get a Guarantor
If you're unable to save up a larger deposit or you can't find a lender with a higher LVR limit, then you could get a guarantor. A guarantor is somebody who agrees to guarantee your loan. This means that if you can't make your loan repayments, then the guarantor will have to pay them. This reduces the risk for the lender and allows you to borrow a higher percentage of the property's value.
4. Get a Home Equity Loan
If you already own a property, then you could use it as security for a home equity loan. This will allow you to borrow a larger amount of money and lower your LVR.
Conclusion
If you are planning on refinancing your home loan in Australia, it is important to be aware of the potential costs associated with Lenders' Mortgage Insurance (LMI). Although you may be able to avoid paying LMI twice by shopping around for a more competitive deal, there is no guarantee that this will be the case. As such, it is important to weigh up the costs and benefits of refinancing before making a decision.
Wealthy You is a mortgage company in Australia that offers Sydney a variety of mortgage solutions to meet specific financial needs. If you are looking for the best home loans in Sydney, get in touch with us today!
