What is LMI?
Lenders mortgage insurance (LMI) is a kind of insurance used to protect the banks or lending institutions if the borrower defaults and fails to meet their home loan repayment obligations. LMI is a fee that’s required by the bank, but charged by the insurance company.
When is LMI Required?
Generally speaking, a lender will require you to pay for LMI if your home loan deposit is less than 20% of the total value of your property – or your loan-to-value ratio (LVR) is more than 80%. However, as different lenders may have different rules, it could be worth checking each lender’s policy.
How is LMI Charged?
Banks and lending institutions usually have business agreements with major insurance companies. LMI fees also vary from lender to lender, as each bank has its own preferred insurance products. Loan applicants cannot choose their own insurance companies. The higher the LVR, the higher the premium. And the higher the loan amount, the higher the premium.
LMI is a one-off, non-refundable payment made at loan settlement, which means if you refinance your loan to another lender in the future, you need to pay for a new LMI policy through the new lender.
How to Avoid Paying?
If the borrower has a steady income, some lenders may waive the LMI fee for certain professions such as accountants, lawyers or doctors. Shop around with different lenders, as there are lenders that will allow borrower to borrow up to 90% LVR before they charge LMI fee. Also you can lower your LVR or use a guarantor to avoid paying LMI.
Is It Worth Paying?
LMI can be worth paying in circumstances where you don’t have the time to save up a 20% deposit. Especially in a property market where prices are rising faster than that you can save, or if there’s a rare opportunity to snap up your dream house at a good price, getting into the property market faster and paying the extra fee can be a better choice.
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