Could paying lenders mortgage insurance be a good idea?
A negative perception surrounds lenders mortgage insurance (LMI). Home buyers and investors see it as an expense that should be avoided at all costs. However, avoiding LMI isn’t a simple decision to make. Paying for LMI could unlock opportunities for you.
It’s important to look at the bigger picture rather than solely focusing on how to minimise the cost of a loan.
Lenders Mortgage Insurance (LMI) is an insurance premium paid by the borrower that protects the lender if you can’t pay back the loan. It’s also there to protect the Australian banking system against mass defaults. LMI is not there to protect you. You cannot claim on LMI.
If you haven’t saved a 20 per cent deposit, a lender may ask you to pay lenders mortgage insurance. It depends on the individual lender’s rules.
If you continually default on your loan, the lender will ultimately pursue you for the outstanding amount before they claim on the LMI. That means they will sell your house then claim any amount they are still owed against the LMI.
Even then, you are not in the clear because the LMI provider might seek to recover from you what they have had to pay to your lender.
How is LMI different from mortgage protection insurance?
LMI doesn’t cover you under any circumstances. If you are out of work or have other problems that prevent you from making payments, you cannot claim on LMI.
The cost of LMI varies between lenders and depends on the amount borrowed and your loan to value ratio (“LVR”). Your LVR is calculated by dividing the amount of the loan by the value of the property. Typically the higher the LVR ratio, the higher the LMI premium. For example, someone borrowing 90% would pay a higher LMI premium over someone borrowing 85% based on the same property value.
There are several LMI providers and the calculation methods for LMI can vary from provider to provider. Each lender typically has a preferred LMI partner, which means the costs for LMI can vary from lender to lender.
LMI can be paid upfront or, more commonly, it will be added onto your loan.
There are conditions where lenders discount or waive LMI. It might be that you work in a profession where LVRs can go up to 90 per cent before a need for LMI is triggered. Those professions can include medical professionals, lawyers, solicitors and barristers, accountants, and engineers.
So is there any benefit to paying LMI? Should you try to do everything you can to avoid paying LMI because it’s an extra expense for insurance that doesn’t protect you, the borrower?
You need to consider the bigger picture and what paying for LMI can help you to achieve. By accepting that you’ll pay LMI, you can be open to more opportunities. Those opportunities can be created by property market movements and investing.
Property market movements
It’s important to understand where the property market is heading. You might decide to avoid LMI by taking more time to save a 20 per cent deposit. You could end up paying significantly more than you save on LMI if the property you buy in the future has gone up in price.
Sydney had a median dwelling price of $555,000 in 2012. By 2017 the median dwelling price had risen to approximately $1,000,000. If it had taken you a couple of years to save $30,000 extra for your deposit to avoid LMI, you’re roughly $445,000 worse off due to the property market rising while you waited.
If you are looking to purchase an investment property, the same guidelines apply for LMI. However, LMI can make the running of the property cheaper in the first five years because LMI is tax-deductible over five years.
Paying LMI could bring two benefits in this situation:
1. Generating wealth faster by being able to invest earlier
2. Improving the cash flow of the property in years 1-5
More often than not, people who choose to pay a 20 per cent deposit to avoid LMI cost themselves more money in the long run.
Our advice is that you take into account the bigger picture, including where the property market is heading. Don’t put the cost of insurance ahead of all the reasons you’re looking to purchase a home or investment property.
If paying LMI gives you the opportunity to get into the market earlier, what would that mean to you and your family? What will give you the most satisfaction over the next 10 to 15 years:
• Living with your family in the comfort of your own home earlier than you could if you waited to save a 20 per cent deposit?
• Not having to compromise on where you want to live by buying a cheaper place to avoid LMI?
• Not using up all your cash reserves to make a 20 per cent deposit and leaving yourself no buffer for unexpected life events?
We can help you to put the right facilities in place so you can purchase your new home or investment property with confidence.
We’ll do all the calculations, compare lenders and advise you on whether LMI is right for your circumstances. You’ll be able to make an informed decision on LMI and know the requirements to get the right home loan approved as quickly as possible.
Call Orium on 0477 264 089 or email [email protected] to have a complimentary meeting with one of our experienced mortgage brokers.
Whether you’re buying a home, an investment property, looking to renovate or simply want to check you’re getting the best deal on your mortgage, Orium Finance are experts that make it easy.
Contact us for a complimentary, no obligation meeting.
Call 02 8330 3700 or email [email protected]