When you buy a house in a place with expensive real estate and you can’t fully afford a 20% down payment on your home loan, you may end up hearing something called Lenders Mortgage Insurance (LMI). What’s it about and how does it influence your home loan in Sydney? It’s important to grasp the concept of LMI if you’re seeking a home loan under these circumstances to make sound decisions about your financial commitments.
Define Lenders Mortgage Insurance
Lenders Mortgage Insurance may be required when the home loan application exceeds 80% of the property’s value. This kind of payment can be expensive but is paid only once. The amount will depend on how much you borrow from your deposit amount.
How LMI Works
You’re considered a higher-risk investment if you get a loan with high LVR. The LMI will protect lenders against you going bankrupt in the future. However, this means your payments will be higher because lenders recover insurance payments through their interest rates and fees. You can pay for the charges on one lump-sum or add it to your loan amount so you could get charged with interest every month throughout the duration of your loan.
Why LMI Is Necessary
Saving up for a 20% down payment can be a challenge in high-price housing markets. This often makes it the most common hurdle to homeownership. LMI solves this problem. Despite higher costs involved, many buyers consider it a reasonable compromise. Especially for first-time homebuyers, this is a way to lead them in and get homeownership much faster.
The Impact of LMI on Your Home Loan in Sydney
LMI helps you get into your own home in popular Sydney sooner when a small deposit is all that stands between you and those notoriously high property prices. But because LMI is based on how much you’re borrowing and your loan-to-value ratio (LVR), you might see yourself having to pay more over the life of the loan, which in turn means paying off a bit extra each month.
Calculating LMI Costs
LMIs, meanwhile, can also evolve from lender to lender – with the amount you borrow and your loan-to-value ratio (LVR) influencing how much they cost. It’s not a set fee. Instead, it varies based on these variables. An LVR is the proportion of the loan amount that you borrow over your property value. The higher the LVR, the higher the LMI. For instance, if you take out a loan which represents 90% of the property’s value versus just borrowing 85%, the cost of LMI is higher.
There are online calculators that can give you an idea of how much LMI will actually cost at different loan sizes for your specific Loan-to-Value (LVR) ratio.
Ways to Avoid or Reduce LMI
If you don’t want to pay LMI, there are some things you can do:
- Raise Your Deposit: The most effective means of dodging LMI is to save more for your deposit. With you reaching that 20% threshold, you will then avoid paying LMI altogether.
- Get a Guarantor: Every now and then, lenders can allow someone related to you to be a guarantor as part of your loan. Less risk for the lender and helps you avoid LMI.
- First Home Buyer Schemes: In Australia, there are different government schemes that can help first home buyers steer clear of LMI or at the very least lead to a reduction like the First Home Buyer Assistance Scheme.
LMI & Your Long-Term Financial Plan
What Lenders Mortgage Insurance represents may be an added burden but one that while inconvenient does form part of the bigger financial picture. People are willing to pay this fee for early entry into the housing market. However, you need to determine if the cost of LMI is worth it when compared with ownership and ensure it fits your financial objectives.
Things to Think about When Paying for LMI
- Loan Repayment Terms: It may add to your loan size and you’ll also be paying interest on it for the life of your mortgage. This can significantly drive up the cost of your loan.
- Sustained Property Value Growth: In the case of Sydney, property values generally trend an appreciation over time. Purchasing in the market sooner using LMI to assist you may actually see this growth happening while you also benefit.
- Lender Policies: These differ based on the lender, such as how they calculate LMI and what they offer as payment options. This is something that you really need to look out for when making a decision about which lender to choose.
Conclusion: Making LMI Work for You
In a city like Sydney, with the purchase prices of homes so high, most first home buyers will require Lenders Mortgage Insurance as part of their loan. You will pay more for it, but LMI can provide a shortcut to quickly enter the housing market. Knowing how it works and what impact it has on your home loan in Sydney will allow you to make better choices in reaching your financial goals.
AFMS Group: Your Home Loan Professionals
Here at AFMS Group, we are well aware that Lenders Mortgage Insurance is not the easiest to get right. We’re here to simplify everything for you, providing the home loan solutions that best fit your situation. Are you purchasing for the first time? Are you thinking about refinancing? Our team is here to assist throughout. Together we can explore your options and get you on the road to homeownership. Call us today.
