When buying your first home, patience is one virtue that you should hold close. You have to be patient enough to make the right decision especially if you are relying on a home loan. If this virtue lacks in your personality, you may end up paying Lender Mortgage Insurance (LMI). Many homeowners don’t understand what LMI is and end up making wrong choices while seeking mortgage. Lender mortgage insurance (LMI) is an insurance policy that protects the financial institution or lender from financial loss when you (the borrower) cannot repay your home loan.
Lender mortgage insurance generally protects the lender and applies to home loans that seem too risky to agree to or trust. The level of risk involved is directly compared to the home Loan to-Value Ratio. However, it can also be determined by the financial capability of the candidate. With LMI policy, lenders will not lose out their finances due to a deficit and so they will be able to lend more home funds. You should not confuse lender mortgage insurance with regular mortgage insurance available for borrowers protecting themselves against loss of job or sickness. Also, you should also know how LMI works before you make any home investment move.
Lender mortgage insurance applies to Australian home loan borrowers with a Loan-to-Value Ratio (LVR) higher than 80%. For the self-employed entities or special situations, the LVR commences at 60%. Loan-to-Value Ratio (LVR) is generally the percentage of the total property value that you have obtained from the lender or bank. Having a lender mortgage insurance allows you to buy your dream home with less amount; let say 5% of the buying price. As a first time home buyer, this is a great opportunity as you will create more investment opportunities. You can use the fund to buy a larger house, change location or do remodeling. The amount of money you pay for LMI will vary depending on the amount of property value you borrow and the loan amount. The great the loan you are borrowing from the lender, the higher the potential loss of the lender when you default. And so, the higher the cost of insuring the loan. The amount of deposit you have in your account will also impact the cost of paying LMI. Hence, the smaller deposit you have, the bigger the cost of LMI.
There is a great difference in occupancy terms when it comes to a house you live in and one that you rent out. In the eyes of a lender, your LMI premium will also be affected by the owner-occupied house versus investment case scenario. Lenders will charge less interest rates on an owner-occupied house loan against an investment property.
Some homeowners may opt to refinance. However, lender mortgage insurance is not transferrable and only protects the lender. If you decide to refinance to another home loan, you will still be borrowing above 80% LVR and you will have to pay your LMI once more. Hence, you will just offset the benefits of refinancing.
Whenever you opt for lender mortgage insurance, you have to speak to your potential lender about the deal and calculate the costs. You will ascertain whether you are making the right investment decision or not. If you need more information on how lender mortgage insurance and refinancing will affect you as you seek a home loan, get in touch with the best finance experts at Wyndham Finance.