Applying for a Mortgage Loan? I'm sure you've heard the term "LMI".
So, what is LMI? Should you consider it or avoid it?
LMI is short for Lenders Mortgage Insurance.
It is the insurance that covers the lender’s risk within a residential mortgage transaction should the loan go into arrears and the borrower is unable to resolve the situation satisfactorily.
It is required when the value of a loan is more than 80% of a property’s purchase price or property valuation.
A higher deposit means a smaller loan amount and therefore a lower LVR (Loan-to-Valuation-Ratio) thereby reducing the lender’s risk.
While a 20% deposit generally provides a good buffer against any drops in property value over the life of a loan, LMI can also provide the same protection.
Its purpose is to ensure security for the lender in case the borrower fails to make loan repayments. Even though the actual house acts as security, the nature of the property market, like any investment class, means there is a chance that its value could decline, resulting in a financial loss for the lender.
It protects the bank or lender.
LMI may be an added expense. It may appear that it is exclusively favorable to the lender but there is value to borrowers in paying the premium. Saving a 20% deposit to buy that flat can seem an insurmountable task. That’s where insurance can help.
- Alternative to using a guarantor or having to save for a bigger deposit
- Allows a borrower to independently purchase a property
- It buys time
- Borrowers with smaller deposits are able to enter the market sooner
- With market prices rising rapidly, paying LMI allows you to buy now which could be cheaper than taking the time to save a bigger deposit
The major benefit of LMI is that it allows the dream of homeownership to become a reality for a lot of first home buyers. Dream Catchers Lending is an MFAA-accredited member. Please leave us your details or call us if you are looking for a mortgage broker.