Every cent you save matters when you’re purchasing a house for the first time. However, if it isn’t possible for you to save a big enough deposit to buy a home, then chances are that you will have to pay Lender’s Mortgage Insurance. This can be a huge cost for someone who has never bought a property before. Therefore, a wise approach is to know about it beforehand and factor it in accordingly. Here are our tips on how to avoid lenders mortgage insurance.
What is Lenders Mortgage Insurance and Who needs it?
It is important to know what Lenders Mortgage Insurance (LMI) is and how a person becomes liable to pay it. LMI is a one-off insurance payment that safeguards a lender in case a borrower defaults on a loan. In other words, it provides protection to your lender against the risk of loss.
If you are purchasing a home for the first time and have a high loan to value ratio, you would probably end up paying for the Lenders Mortgage Insurance.
How is it Calculated?
Based on the value of the property you have purchased, LMI also takes the location and amount of the loan into consideration. For example, if you buy a house for $500,000 and have to pay an initial deposit of $30,000, being a first home buyer, you will probably have to pay approximately $12,500 as Lenders Mortgage Insurance.
Can it be paid in Instalments?
The answer is yes! You can either make an upfront payment or you can choose to add it to your loan balance. By choosing the latter, the amount can be paid off through monthly repayments. However, if you choose to add it to your loan amount, you will have to pay the interest charged on premium until the loan expires. This will result in a substantial increase in the overall mortgage cost.
What Factors Affect the Cost of Lenders Mortgage Insurance?
In addition to the deposit size, there are a number of other factors that determine whether you need to pay the insurance amount or not. For example, a lender’s decision can be impacted by the nature of your property, i.e., either rental or owner’s occupied. Moreover, it can also be impacted by your employment status.
How to Avoid Lenders Mortgage Insurance?
Following are some of the tips you can use in order to avoid lender’s mortgage insurance cost:
• Maintain a Reasonable Amount of Deposit
You can purchase a home without the paying lenders mortgage insurance. For that, you have to maintain a reasonable deposit. If you have a small deposit and your loan to value ratio is more than 80 percent, the risk of loss for the lender increases. On the other hand, having a bigger deposit means the loan amount will be lower and hence, lower risk for a lender.
You do not have to pay Lender’s Mortgage Insurance if you have a deposit worth 20% of the property value. Therefore, you need to decide whether the dream of buying a new home should be delayed while you save a little more money, or if you should buy a property sooner with the added cost of the mortgage.
• Find a Guarantor
If you don’t have 20% of the loan, finding a guarantor can be a good option to avoid LMI costs. Your guarantor will ensure that they will cover a part of your loan in case you fail to make the loan payment. It can be the ‘bank of your parents’ that provides financing for your home with a loan or cash gift. The amount paid by a guarantor can also add up to your deposit and enable you to avoid the mortgage payment.
• Seek Professional Advice
Last but not the least, always seek professional advice. A mortgage express broker can assess your financial position. Your broker can also help you secure the right source of finance that is in line with your financial goals. Moreover, brokers also work with a variety of lenders in the market. This can be an additional opportunity as they might help you find a loan without having to pay the mortgage insurance.
Chat to our team of brokers today on 1300 088 065 or email Joshua at [email protected]