What is Lenders Mortgage Insurance (LMI)?
Think of Lender’s Mortgage Insurance as your standard motor vehicle insurance. You pay a premium to cover the expenses of any repairs caused in an accident. Lenders Mortgage Insurance covers your lender in the instance that you are unable to meet your ongoing repayments.
Yes, you read right, LMI covers the lender. There is a misconception that Lenders Mortgage Insurance exists to assist the applicant, in the unfortunate event they are unable to repay their home loan. This is not the case. Lenders Mortgage Insurance covers the lender from any loss if you are unable to meet your repayments.
If a lender is forced to repossess your home and sell your property at a reduced amount, the difference is covered by the lender’s mortgage insurance policy.
Lenders Mortgage Insurance is charged by most lenders when an applicant is classified as “higher risk”. Applicants who are unable to provide a 20% deposit, are deemed a higher risk.
These days, a high percentage of first home buyers are required to pay Lenders mortgage insurance because of the high prices of property in Australia.
How is Lenders Mortgage Insurance Calculated?
Lenders Mortgage Insurance is calculated based on two factors;
- The overall loan to valuation percentage (LVR)
- The overall loan amount
The lender calculates the premium and includes the Lenders Mortgage Insurance as part of your overall loan. Most mainstream lenders will provide up to 95% of the property value for owner-occupied purchases, including the Lenders Mortgage and investment, up to 90% of the property value, including Lenders Mortgage Insurance.
Here is an example of how lenders calculate Lenders Mortgage Insurance;
Tony is a first home buyer and has a $70,000 deposit and wants to purchase an established property for $600,000.
|Stamp duty and costs||$1,622.70|
|Total Loan Amount||$601,622.70|
|Total Base Loan||$531,622.70|
To work out the base LVR, we calculate the Base loan amount and divide it by the property value, which is 88.60% based on the above transaction.
For this example, we are using a manual assessment offered by a lender. Loans between $500,000 > $1M and between 88% and 89%, 2.27% of the loan amount will be factored in as Lenders Mortgage Insurance. Based on this calculation the lender’s mortgage insurance will be
|Base loan amount||$531,622.70|
|Multiplied by 2.27% equals||$12,067.83|
|Total require loan is||$543,690.53|
|Total LVR including LMI||90.61%|
Based on an owner-occupied purchase, most lenders would accept this transaction who provides lending up to 95%.
Every lender calculates LMI differently and it’s not a one size fits all approach. Based on the above example, we calculated the LMI with another lender and their calculation was a $6,445 higher based on the same transaction. It definitely pays to use a mortgage broker who can provide different LMI amounts quite easily.
If you would like to discuss further LMI scenarios and the minimum deposit you would need to get your next property, complete our contact form and one of our friendly mortgage broker will contact you shortly.
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