LMI is a fee charged by finance lenders.
It’s generally charged when you have a deposit which is less than 20% of your property’s purchase price.
If you have a 10% deposit on a property of $500,000, LMI is approximately $7,920*. As the purchaser, you need to make sure you’re happy to pay it.
Do I need the funds upfront?
The LMI is added directly to your home loan in most cases, so it’s not a fee you need to pay upfront.
Why should I pay it?
It’s a common grumble of many buyers; but if your deposit is under the minimum required by your lender to avoid LMI, (usually around 20%), you’ll have little choice in the matter (in most cases). Without paying the LMI your lender won’t release the funds you need to buy your property.
Why is it a charge at all?
LMI acts as a security to the lender, who considers you a ‘high risk’ borrower with anything under 20% deposit.
LMI protects the mortgage lender in the event that you, the borrower, defaults on their loan.
Can I avoid it?
Yes, you can save for a bigger deposit.
High loan terms (borrowing 90% of your property’s value) most likely means you’ll pay more money in interest over the course of your mortgage, as your loan will take longer to pay off.
It’s worth remembering and bearing in mind.
Is saving for a larger deposit an option? A larger deposit means you’d borrow less and therefore pay less interest over the course of your loan, but it also means delaying your purchase – not always an option.
If the market is strong prices could rise, and so paying LMI now could be cheaper than the extra dollars needed to secure a property in a year’s time. That’s a choice you can make with your financial advisor, and it will be an estimate at best.
originally posted on realestate.com.au