Lenders Mortgage Insurance (LMI) is a financial product designed to protect your mortgage lender against your default and paid by you. LMI’s calculation is based on the size of your home loan, the value of your property, and location.
Although you probably won’t have to worry about it when you buy a parcel of land for sale, it’s hard to avoid when seeking financing for a house and lot.
The good news is that this one-off fee could be capitalised on your mortgage and added to your principal balance. The bad news is that it could easily make your loan more than $10,000 more expensive. If included in the principal, you’ll pay interest on it over the long term.
Are you doomed to pay for LMI? Of course, not. It may be hard to avoid, but you could if you’re able to do any of the tips below.
Borrow No Greater Than 79%
Paying a large deposit is a sure route to LMI avoidance. Such a massive sum will neutralise most of the risk your prospective lender is wary of, which is the very reason why LMI is being charged in the first place.
Why 79%, you ask? It’s because LMI usually applies when the amount borrowed exceeds 80% of the property’s value or higher. You may be able to have the insurance waived when you pay 20% upfront, but you should make it 21% to be on the safe side. After all, even a one-dollar reduction from your loan amount could already translate to $800 in savings.
Involve a Guarantor
If you take out a guarantor home loan, your lender will be able to use two securities for your loan: your house and the property of your guarantor. The collective value of these pieces of collateral is enough to erase the genuine savings requirement, so it’s also big enough to remove LMI out of the equation.
Apart from not having to pay the LMI premium, you may also qualify for a lower interest rate. You may be able to borrow more than the cost of your property and use the funds for other purposes like debt consolidation.
It’s never ideal for splitting the risk of taking out a mortgage with your parents or other family members. But it’s a viable option at your disposal to minimise your expenses and save a ton of money.
Some lenders like to play favourites when it comes to certain professionals, especially doctors. These financial institutions are willing to bend the rules, like waiving an otherwise applicable LMI premium, to accommodate the business of traditionally low-risk borrowers.
This privilege isn’t limited to medical professionals. You may be able to avoid LMI if you’re a pharmacist, lawyer, mining engineer, or accountant.
Most of us can’t avoid LMI, no matter how hard we try to find a way out. Fortunately, you could reduce it if you apply for a mortgage with a strategy. Pay the highest deposit you can; increase your genuine savings; pick the right lender and insurer to qualify for the lowest premium available.