Getting a mortgage is a lesson in acronyms and abbreviations. It is like learning a whole new language. If you are going to use property investing as a tool to create a wealthy life, then you must understand the lingo.
Buying a house does not come without costs. There are many when you buy a house (the good thing is using a broker is free – the banks pay us and we do all the work for you)
Lenders’ mortgage insurance (LMI) is one fee associated with home loans that won’t apply to every home buyer, but it’s important to know about it if you’re considering taking out a home loan.
What is lenders’ mortgage insurance?
LMI is insurance taken out by your lender. It’s designed to give them security should you be unable to meet your repayments due to defaulting on your home loan. In most cases, LMI applies when you borrow more than 80 per cent of the total value of the home.
LMI is a one-off payment that can be either included in your home loan, or paid upfront upon settlement.
The advantages of LMI
A big deposit can impact if you have to pay LMI. Although LMI can make property more accessible.
You might be eyeing off your dream home but don’t have a deposit of 20 per cent or more. If you can show your lender you can afford to meet the repayments and take advantage of LMI, it’s possible they might lend you the amount you need.
How is it calculated?
Lenders’ mortgage insurance is calculated differently by every lender and your broker will know where to go to get the best deal.
The amount of LMI you’re charged depends on your loan-to-value ratio (LVR). Generally, the lower your LVR, the lower the fee. LVR is calculated by dividing the total cost of your home loan by the value of the property. LMI kicks in at 81%
Your loan-to-value ratio (LVR) is calculated by dividing the cost of your home loan by the value of the property you’re buying.
How do you work this out?
I can do it for you. It is different for each property and situation and bank. Message me and we can work this out together debs@smartline.com.au
Concessions
Some states offer LMI-related concessions. New South Wales, for example, abolished insurance duty on LMI as part of its 2017-18 budget. This could potentially save property buyers around $3,000 on a home valued at $800,000 with a deposit of $50,000.
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