Understanding Mortgage Lenders Insurance
Lenders Mortgage Insurance (LMI) is one of the ways to help you achieve the dream of home ownership sooner without having the 20% deposit which is typically required by most banks and financial institutions.
With LMI, lenders may allow you to borrow a higher proportion of the purchase price, allowing you to purchase a property with a smaller deposit than would otherwise be required. It may also enable you to borrow at an interest rate that is comparable to a borrower who has a larger deposit. Lenders’ mortgage insurance protects your lender in the unfortunate event of you defaulting on your home loan.
But, you need to know the costs!…
When lenders agree to lend a customer money, there is a small risk that they won’t get the money back if the customer is not able to meet the repayments. Although they have the house as security, if property values decline that security may not be enough to cover the outstanding loan when the lender comes to sell it.
This insurance helps lenders broaden the net of who they are able to lend to by taking some of the risk out of lending the money – Remember Mortgage Lenders Insurance covers the banks/lenders arse – not yours!
For example if you are looking to buy a $500,000 home and have a $65,000 deposit – this means you have a 13% deposit towards your purchase. Banks require a minimum of a 20% deposit – otherwise anything less than this will be subject to lenders insurance (remember this is to protect the bank – not you!)
In this example you would have a 87% LVR (or Loan to value ratio) whereas if you have a 20% deposit ($100,000) then this creates an 80% LVR (i.e this is the ratio of the loan amount divided by the value of the property)
So in the case above, your the deposit is $65,000 – being $35,000 short of a 20% deposit.
Your lenders mortgage insurance would look like this; (refer to table below)
$500,000 less $65,000 = $435,000 loan amount or ($435,000/$500,000 = 87% LVR)
$435,000 x 1.146% = $4,985.10 + $448.66 (NSW Stamp Duty Loading of 9%)
Total Lenders Mortgage Insurance Payable = $5433.75
Remember – Lenders’ mortgage insurance should not be confused with mortgage protection insurance, which covers borrowers for the payment of their mortgage instalments in the event of unforeseen circumstances including unemployment, illness or death.
Note these figures and costs are approximate and should be calculated by your mortgage broker and/or lender