Lender’s Mortgage Insurance

LMI is short for Lender’s Mortgage Insurance and it is designed to provide lenders protection in case the borrower defaults on their home loans.

LMI is a one-off fee charged by the lender to home buyers who have less than 20% deposit and need to borrow more than 80% of the value of the property. Since it is extremely difficult to save a deposit of more than 20% ($120K for a $600K property) most first home buyers and investors will be required to pay Lender Mortgage insurance.

The LMI is added (capitalised) to your home loan in most cases, so you done need to need to pay upfront. LMI protects the only mortgage lender not you in the event that the borrower is unable to pay their loan.

When is LMI required?

You may be required pay LMI depending on the LVR of the loan. Some professions like Doctors and medical professions, Charted accountants are not required to pay LMI even with 10% deposit and they are borrowing 90% of the house value.

How Much does LMI cost?

LMI premium costs depend on LVR, loan amount and whether there are existing loans on the property.

When does it need to be paid?

If you have less than 20% deposit and do need to take out LMI, the premium will need to be paid at settlement. Usually, it is added (capitalised) to the loan up to a maximum of 95% in most of the cases.

Is LMI refundable?

LMI premium is not refundable to cannot be transferred to another lender. This includes even if you decide to refinance to another lender or pay off your loan or your property grows in value and LVR is below 80%

How can I avoid paying LMI?

There are only three ways to avoid paying Lenders Mortgage Insurance:

1.  Save 20% or more as a deposit; or

2.  Have someone (parents, grandparents) siblings to be a guarantor for your loan.

3.  Arrange Non-Refundable GIFT from a family member or friend to the value of 20% of the property purchase

Your guarantor usually a family member (parents in most cases) will provide a guarantee for your home loan which is secured on their property or term deposit.  This arrangement will let you get into the property market sooner. Once you have paid off guaranteed part of your loan or your property has increased in equivalent value, then you can apply with the lender to remove the guarantee.

Guarantor loans allow you to buy without a deposit and some lenders have tightened the criteria for guarantor loans. Guarantor loans have become very popular in recent years due to affordably issues particularly first home buyers.

Benefits of a guarantor loan?

No deposit home loans have been withdrawn from the market in recent years (after GFC). Guarantor loans the only way to borrow 100% or more of the purchase price.

Guarantor loans have several benefits for you as the borrower:

• No need to save a deposit
• LMI savings
• Since you are borrowing under 80% you get better rates as some lenders penalise if borrowing over 80%.

Non-refundable Gift

Another way of saving LMI is to get a GIFT form a family member or a friend. This can be used in conjunction with your savings and as long as the total of your savings and GIFT is o20% you can avoid paying LMI.

Some of the lenders have their own form to be signed by both people giving the gift and receiver.

For a gift to be considered by lenders a gift letter or statutory declaration needs to be signed by the family member or friend, stating that the money is to be used for the purchase of property and that the GIFT is unconditional. Some of the lenders have their own form to be signed by both people giving the gift and receiver.

All of the lenders have following requirements for Statutory Declaration confirming the source of a deposit

Stat Dec must state or must be:

• Dated.
• Signed. the person who is giving the gift.
• Contain the name of the person receiving the gift.
• State gift amount.
• Declare that the gift is “unconditional, non-repayable.
• Signed witnessed and dated by a Justice of Peace.

Contact our experts at  Medico Home Loans on 1300 537 000 to help you understand what you’re up against.