The pros and cons of paying for LMI
(lenders mortgage insurance)
LMI is an insurance policy designed to protect the lender (not the borrower) in the event the borrower defaults on the loan and the lender isn’t able to recoup all its money by selling the borrower’s property.
Lenders typically make borrowers pay LMI when they buy a property with less than 20% deposit, although exceptions apply. Some lenders expect borrowers to pay the premium up front, although many allow borrowers to add it to their loan.
LMI premiums can be significant – for example, if an owner-occupier first home buyer wanted to purchase an $800,000 home with a 10% deposit (i.e $80,000), their LMI bill could be upwards of $20,000, depending on the lender and state or territory.
Paying out all that money is, clearly, an unappealing prospect, which is why many people try to avoid LMI at all costs. However, when someone considers the bigger picture, they might find there are some circumstances in which the pros of paying LMI outweigh the cons.
The case for LMI
The biggest benefit of taking out a mortgage with a high loan-to-value ratio (LVR) and paying LMI is that it allows borrowers to enter the market potentially years ahead of schedule.
To continue the hypothetical scenario mentioned above, if the first-home buyer wanted to avoid LMI, they would need to increase their deposit from $80,000 to $160,000 – and saving all that extra money might take years. Our first-home buyer might not want to wait so long to achieve the security and satisfaction that comes from owning your own home.
Delaying home ownership doesn’t just have an emotional cost; it can also have a financial cost. For example, by the time our first-home buyer was able to save a 20% deposit, they might find that property prices had increased by more than the LMI bill they would’ve had to pay had they entered the market years earlier. Also, if property prices had increased, our first-home buyer would now need to save an even larger amount – the hypothetical $160,000 figure mentioned earlier would no longer cover a 20% deposit for the same property.
As a result, there are circumstances in which paying LMI can be a smart move, although it depends on a borrower’s financial position and risk profile.
I can help if you are unsure about LMI
If you want to buy a property and have a relatively small deposit, please come to have a chat.
First, I’ll explain exactly how LMI works. Second, I’ll crunch the numbers for you, so you can make an informed decision about whether it would be in your interests to apply for a high-LVR loan and pay LMI.
Licensing statement: Rayne Finance ABN [70 605 100 838] is authorised under LMG Broker Services Pty Ltd Australian Credit Licence 517192. Disclaimer: (1) As with any financial scenario there are risks involved. This information provides an overview or summary only and it should not be considered a comprehensive analysis. You should, before acting in reliance upon this information, seek independent professional lending or taxation advice as appropriate and specific to your objectives, financial circumstances or needs. This publication is provided on the terms and understanding that: (2) LMG Broker Services Pty Ltd, Rayne Finance (Seed Lending Pty Ltd) and the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication. (3) LMG Broker Services Pty Ltd, Rayne Finance (Seed Lending Pty Ltd) and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to the maximum extent permitted by the law to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication.
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