First Home Buyers | LMI explained
Unfortunately, Lenders Mortgage Insurance (LMI) and first home buyers are commonly mentioned in the same sentence. Paying LMI is becoming a more popular way for first home buyers to achieve home ownership. Whilst this is a cost for a first home buyer, the lack of Government assistance for the deposit savings phase has meant that a considerable number of first home buyers are forced to enter the market with a deposit of less than 20% of the property purchase price.
What is LMI?
Traditionally, banks would require the borrowers to have at least a 20% deposit for a standard loan. However, by charging an insurance premium called LMI, lenders are able to offer lower deposit home loans to borrowers. This insurance premium protects the lender if a borrower is unable to meet their mortgage repayments and the property has to be sold.
How much is LMI?
The cost of LMI varies according to:
Mortgage insurer – there are only a handful of mortgage insurers in Australia and like all insurance companies they all have slightly different premiums
The loan amount – LMI is calculated on a tiered scale, the higher the loan amount, the higher the premium
The deposit amount – the lower the deposit, the greater the risk to the lender resulting in greater LMI
Type of savings – an applicant that contributes genuine savings (or has a satisfactory 6-month rental history) will incur a lower LMI premium than an applicant who has non-genuine savings
Example: Estimated LMI costs for a $500,000 property purchase price with genuine savings at various deposit levels
How would I pay for LMI?
Fortunately, majority of lenders and LMI insurers do not require the premium to be paid upfront, this premium can be added onto the loan and therefore paid over the life of the loan. The three common forms of LMI payment include:
Upfront payment – A first home buyer can choose to pay the LMI in addition to their deposit, this method is commonly used when the LMI premium is minimal
Partial capitalisation onto the loan – A good proportion of Australia’s lenders allow LMI to be capitalised to a certain percentage of the total property purchase price, e.g. 95% (big 4 banks), 97% or 98%
Full capitalisation onto the loan – A few lenders will allow the unlimited capping of the LMI premium. This allows first home buyers to cap the entire amount of LMI onto the loan regardless of the percentage of the total property purchase price. This ensures you only need to save the 5% deposit + the funds for the property purchase costs
Family Pledge loan facility are another way of avoid paying LMI if you do not have the initial 20% deposit. However, we understand that this option is not available for everyone. By using an eligible family member’s property to cover the 20% deposit, you may be able to borrow 100% of the property purchase price + associated property costs and avoid paying any LMI.
Get specialist help
The mortgage market is extremely complex, and getting what’s right for you is not as simple as visiting your local bank. You need specialist help – the sort of help you get from us at Certified Lending, give us a call today on 0433 590 621 and let us help you get into your first home.
"Disclaimer: Your full financial situation would need to be reviewed prior to acceptance of any offer or product"