Is It Worth Paying LMI - July 2023
July 24, 2023 / Written by Rich Harvey
By Guest Blogger, Louisa Sanghera, Principal Broker,
Lender’s mortgage insurance (LMI) is a type of insurance you can take out to help you buy a property when you have less than 20% deposit saved. It can help you get into the property market sooner – but it comes at a cost.
Let's explore how LMI works, the pros and cons and how much you can expect to pay.
Right now, many people are struggling to get finance approval because their borrowing capacity has been smashed by higher interest rates. Research is showing that for a couple earning a combined gross income of $150,000 per year with no kids, their borrowing power has dropped from $994,000 in March last year to $800,000 this year.
We’ve had 2 more rate rises since then – so it’s now
While LMI can’t help to boost your borrowing power, it can help you buy a home with a much smaller deposit (as low as 5%)
Essentially, it’s insurance that a lender takes out to protect itself against the risk of you not paying your mortgage. It reassures the lender that if you stop making payments and your property has to be sold for less than the value of the mortgage, they can claim the difference on insurance.
Importantly, LMI covers the lender, not you – but YOU pay the premium. The reason you pay the premium is because you are getting the benefit. Without LMI and with a smaller deposit, the lender wouldn’t feel comfortable giving you a loan.
It might look something like this:
- You want to buy a home for $700,000
- A 20% deposit is $140,000 – a huge sum of money!
- By sticking to a stringent budget and setting aside a couple of tax returns each, you and your partner are able to save $70,000 (still a whopping big amount!)
- This is equal to a 10% deposit, and your lender accepts this deposit together with LMI
- Your LMI premium is $12,500
LMI can be charged as a lump sum payment upfront, or it can be capitalised or added to your loan (so on this example of a $630,000 loan and LMI of $12,500, your bank might offer you a loan of $642,500).
The answer to this question is highly personal, because it depends on your individual goals, income, budget and overall situation.
But as a mortgage broker, I can say that I have seen LMI help countless borrowers get into the property market sooner. Here are some of the pros and cons to consider:
After reading this far, you might be wondering: is it worth paying an extra 1-3% of a property’s value in LMI in order to get a property loan, or are you better off waiting another three or four years to save for that full 20% deposit?
This is really a personal decision and depends on your unique situation, but there is where working with a broker can be worth its weight in gold. A finance broker can look at your income, savings and options, and help you work out the best path forward – whether it involves LMI or not. Best of all, brokers are free, so you can access our expertise and guidance at no cost to you.
Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.
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