Lenders mortgage Insurance (LMI) is a way to purchase property when you have a low deposit and need to borrow more than 80% of the property value or purchase price. It allows the borrower to borrow a higher amount against the value of the property. In a lot of cases you can borrow up to 95% of the purchase price when you use LMI. There are exceptions to this, if you are a recognised Australian medical specialist, for instance, some lenders will allow you to borrow as much as 85% or 90% of the purchase without LMI.
Here’s a short video from LMI insurers Genworth that explains LMI
It should not be mistaken for personal insurances that may protect you in the event of death, sickness, disability or unemployment. Lenders Mortgage Insurance protects your lender, not you, against a loss, should you default as a borrower on your home loan. If the security property is required to be sold as a result of the default, the net proceeds of the sale may not always cover the full balance outstanding on the loan.
How much does LMI cost ?
LMI is calculated on a scale from zero at 80% to the maximum payable at 95% and can generally be added to your loan amount. A first home purchase of $600,000 with a 10% deposit of $60,000 the LMI cost would be $12,042. This is a once off payment, yet it can be added to the loan amount, if this was added to your loan over 30 years it would be an additional $92.00 per month according to Genworth LMI calculators. Try the Genworth LMI calculator here.
Wait and save or buy now with LMI ?
LMI provides an opportunity to purchase sooner rather than later. Depending on how well you can continue to save and maintain discipline, it may be as well to pay the LMI to own the home sooner, especially if house prices and the cost of renting is increasing. Over a period of 30 years, it is likely that your home will increase in value substantially, while your home loan reduces value as you continue to pay it down.