When you begin your home buying journey, one of the various terms you will come across is Lenders Mortgage Insurance (LMI). This insurance may assist certain buyers to access the property market more easily, particularly those that do not have a substantial deposit. But what is Lenders Mortgage Insurance and do you actually need it? In this blog, we will look at LMI’s function and whether it may be beneficial for you.
What is Loan-to-Value Ratio?
When you begin your home-buying journey, one of the most critical factors you’ll need to address is the required deposit. It’s common knowledge that most lenders require a 20% deposit before they will approve your home loan. While you could be forgiven for thinking this figure is set at random, it is actually based on what is known as the Loan-to-Value Ratio (LVR). In this context, the LVR is simply the home loan amount divided by the value of your property, as demonstrated in the graphic below.
However, for most people it can take a long time to save the entire 20% deposit, especially if you are a first home buyer. In recent years, the rate of real estate value increases has meant that even those with high incomes often struggle to accumulate a 20% deposit. Indeed, as we mentioned in Borro’s article on how to boost your savings for a home deposit: “Saving for a deposit is the biggest hurdle for first-home buyers. According to a recent ANZ CoreLogic report, it takes 11.4 years to save a 20% deposit in Australia.”
What is Lenders Mortgage Insurance? (LMI)
Thankfully, you don’t have to spend years saving for a deposit while being at the mercy of property prices. In Australia, if you need to borrow more than 80% of the property value, you will need to take out Lenders Mortgage Insurance (LMI). LMI is insurance that protects the lender, in case you default on the mortgage payments. With this insurance, you are effectively mitigating the risks and increasing the chances that your finance will be approved, which means that you’re more likely to secure that dream home! LMI tends to cost approximately 2% of the total loan amount, but unlike most other types of insurance, it can be capitalised onto your loan – effectively adding it to your mortgage repayments.
Do I need Lenders Mortgage Insurance?
While LMI does not protect you, it does allow lenders to feel more confident about lending to you in the first place. It could be the difference between being a homeowner or missing out altogether. At the same time, if saving a 20% deposit is achievable within a reasonable timeframe, you would benefit from more preferential interest rates and repayments. Using a guarantor may be another way around needing Lenders Mortgage Insurance, and certain industry professions, such as medical or legal, may be eligible for LMI waivers. Ultimately, it all depends on your circumstances and property goals.
At Borro, we’re here to support your property journey, wherever that may take you. To discuss how we can help get you the perfect loan for your perfect home, book an appointment with one of our Borro brokers today or call the team on 1300 1BORRO.
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SPENCETON FINANCE SOLUTIONS PTY LTD ABN 30 627 287 423 is an authorised credit representative of Connective Credit Services Pty Ltd Australian Credit Licence 389328. The information provided on the understanding that it is for illustrative and discussion purposes only. Whilst all care and attention is taken in its preparation any party seeking to rely on its content or otherwise should make their own enquiries and research to ensure its relevance to your specific personal and business requirements and circumstances. Terms, conditions, fees and charges may apply. Normal lending criteria apply. Rates subject to change. Approved applicants only.
