Lenders mortgage insurance: Do I need it?
Wednesday, 13 January 2016 12:00 AM
A loan is a practical way to build your own home without needing a huge amount of capital to purchase it outright. There are many systems in Australia that try to help us get into our dream home quicker, and one of these is lenders mortgage insurance.
Do you need this cover?
Lenders mortgage insurance is a way for loan providers to feel more confident in offering home loans to Australians.
What is LMI?
Lenders mortgage insurance is a way for loan providers - banks, credit unions and so on - to feel more confident in offering home loans to Australians. It covers the loan in the case of default, whereby the credit provider would be able to resell the property in question and recover the lost finances. Should that not cover the costs, the insurer would also pay out.
This means that a credit provider can fund those who wish to design a new home with less risk involved. However it's the home buyer who pays the premium, rather than the provider.
Will I require this cover?
According to Standard and Poor's Rating Services, Australians who wanted to design or buy their own home prior to 1965 could rarely do so without providing a deposit of at least 20 per cent. LMI was introduced as a way for people climbing the property ladder to invest in real estate without requiring the same amount of savings.
Do you require LMI? You only require LMI if you have a loan-to-value ratio of greater than 80 per cent. You can calculate yours by reading our related blog post 'How to set a weekly budget to save for a deposit for your new home', which touches on the process.
In simple terms, the smaller your deposit the higher chance you will require LMI.
What will LMI cost?
As mentioned, the insurance premium for LMI, though a protection for the lender, is paid by the buyer. Unlike most insurance types though, LMI is a single payment made at the time of loan settlement, rather than a monthly fee.
The cost of LMI differs from case to case. It will be calculated based on the size of loan you require, and you can reduce the up-front cost by adding it to the total loan amount, if the lender will allow this.
Should you have any questions, you can always talk to your lender for more information on mortgages, or your local home builder for cost-related design queries.