Lender’s mortgage insurance (LMI) is required in many instances when a loan exceeds 80 per cent of a property’s purchase price or valuation. In very basic terms, when a lender considers a loan to carry a high risk, LMI is likely payable. It’s a costly premium, here’s how you can avoid paying LMI.
Recap: Who pays, and who gets the benefit of the insurance?
Very good question! In short, the borrower pays the insurance premium to protect the bank from losing money if the borrower defaults on their loan and the bank is forced to sell the property.
That’s right, the insurance protects the bank, not the borrower.
In the event the borrower defaults and the bank is forced to sell the borrower’s property, the bank’s insurance will cover the bank for any shortfall between the sale of the property and the loan payout amount.
Save for a higher deposit
A higher deposit means a smaller loan amount, so will decrease the LVR and the perceived risk, which may be the key to avoid paying LMI. The magic number at present is a deposit of at least 20%.
Give the bank additional property security
If you don’t have the financial capacity to meet a 20 per cent cash deposit but still want to avoid paying LMI, you do have the option of providing the bank with additional mortgage security so that the sum of all loans from the bank does not exceed 80% of the value of the security properties.
A common example of this is when a borrower has a home loan with a bank where the LVR is well under 80% and wishes to purchase an investment property. By giving the bank security over both the borrowers home and new investment property in many cases it is possible for the bank to fund all the purchase costs of the investment property without the borrower needing to pay any deposit.
Take advantage of professional benefits
Some lenders consider professionals earning a minimum of $150,000 a year as ‘lower risk’ borrowers (due to the perceived stability and high income) and offer them special loan benefits which can include increasing the LMI threshold above 80%.
Final thought
Ask your finance brokerto use their insider knowledge to help you find a loan that won’t require you to fork out for LMI.