• First Home Buyers: What is Lenders’ Mortgage Insurance (LMI)

    First Home Buyers: What is Lenders’ Mortgage Insurance (LMI)

    Back in the day, having a 20% deposit when buying a home was non-negotiable, but times, they are a-changin’.

    Today, having a smaller deposit – even as little as 5% – and getting Lenders’ Mortgage Insurance (LMI) is widely accepted.

    What is Lenders' Mortgage Insurance (LMI)

    LMI is a one-off insurance premium which a lender will pass on to the borrower for insurance, which protects the lender against the loss it may incur if the borrower is unable to repay their home loan.  LMI will usually apply when a borrower wishes to borrow more than 80% of the value of a property (that is, where your loan-to-value ratio (LVR) is greater than 80%) or, to put it another way, when your deposit is less than 20% of the property’s value.

    In some cases LMI is added directly to your home loan, so you don’t need to pay it upfront, but it can significantly increase the amount of your repayments.

    The amount of LMI you have to pay will depend on the state you purchase in and your LVR. The higher your LVR, the higher the LMI premium will be. LMI can be a deal breaker for some borrowers, so it’s important to work out what your LVR is likely to be based on your savings and projected savings.

    The pros and cons of LMI

    Scott Cheetham, a RAMS Home Loan Specialist from Mona Vale on Sydney’s northern beaches, says while there are pros and cons with LMI, it’s no longer the “bogey-man” previous generations thought it was.

    He says it could be possible to buy a property with less than a 20% deposit.

    In fact, Cheetham says, many first home buyers across Australia simply wouldn’t be able to buy a property without paying LMI, which is worked out on the percentage of the property value borrowed and the loan amount. It can be paid as a lump sum or added to the loan and paid off.

    “LMI is a reality of the current housing market and it’s certainly becoming more and more accepted. It’s not as black and white as it used to be, when people said to avoid it at all costs,” he says.

    If you were to borrow $450,000 to purchase a property valued in NSW at $500,000 (which you intend to live in) with a 10% deposit, you’d be required to pay approximately $9,135 in LMI.

    Cheetham says buyers currently renting need to weigh up paying rent for longer – to save a bigger deposit and avoid LMI – with the upside of getting into the market sooner.

    “Every situation and every market is different, so it’s something you need to look at closely,” he says.

    Bonnie Caine,  a 29-year-old who recently purchased a one-bed off-the-plan apartment in Sydney’s Sutherland Shire for just under $600,000, understands not having a 20% deposit. She bought her place with a 5% deposit, plus LMI.

    It was a no-brainer for the account manager, who is sharing in Balmain while her place is built. “I wasn’t concerned, because by paying the LMI, I was able to get into the market and experience capital growth,” Bonnie says.

    “My property has gone up by more than 10 times the LMI fee,” she says.

    “I had the time up my sleeve and it was the only way I could do it. For me, the potential for capital growth outweighs the fees. It’s simple: black and white,” Bonnie says.

     

     

    Originally published on flatmates.com.au

     

    About the author

    • Raymond

      Raymond A Ram is the RAMbassador for RAMS Financial Group. Raymond works with the RAMS team to bring simple, helpful and expert information on home loans and savings accounts to life with his down to earth and cheeky personality. He enjoys seeing everyday Australians turn their dreams of saving for a goal or getting into a home a reality. 

      Growing up in Goulburn, NSW, Raymond was brought up with good old-fashioned Aussie values of hard work and a fair go. It soon became apparent that Raymond wasn't content for the conventional path of grazing, producing the very best wool, and finding a nice sheep to settle down with. So it wasn't long before his passion for performing and his talent as a likeable larrikin shone through - landing him a few roles such as 'RAMlet'. He was even tipped to play RAM-bo at one point but chose to become star of the small screen instead as RAMbassador for RAMS. He now finds this role so much more rewarding.

      Contact your local RAMS Home Loan Centre about your home loan options.

      Raymond A Ram
     

  • Check out our latest offers

    Find your local RAMS Home Loan Centre

  • Disclaimer:

    The information here is of a general nature only and is not intended to constitute financial or tax advice. You should consult your professional adviser, accountant or taxation expert for advice specific to your personal circumstances.

    The views and opinions expressed in this article are those of the author alone and do not necessarily represent the views or opinions of RAMS Financial Group Pty Ltd ABN 30 105 207 538 (RAMS),  Westpac Banking Corporation ABN 33 007 457 141 (Westpac) or their related bodies corporate. This article is strictly for information purposes only and neither RAMS, Westpac nor any of their related bodies corporate make any representation as to the accuracy or completeness of the information in this article or endorse the views expressed in it.