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The Benefits of Lenders Mortgage Insurance ( LMI)

- Tuesday, March 09, 2010

Raising a 20 per cent deposit can be a challenge but with Lenders Mortgage Insurance (LMI) you may be able to side step this obstacle.

Before LMI was available, lenders would usually lend up to 80 per cent of the value of a property, leaving the buyer to chip in the rest.

When lenders agree to lend you money there is a small risk that they won't get the money back should you default on your repayments. An 80 per cent loan is therefore recognised as the 'safe' risk level by most lenders – should they have to repossess the property.

LMI was introduced some time ago to enable lenders to offer higher percentage loans. The insurance essentially protects the lender for the amount above the 80 per cent level should the borrower default and ultimately end up with their property being repossessed.

Open opportunities with LMI

With the backing of LMI, lenders are willing to lend as much as 95 per cent of the property value as they are protected – and this can make a significant impact on the amount buyers need to put in themselves as a deposit.

As the borrower you pay the premium, but while it may seem like you are paying insurance cover to benefit somebody else, LMI makes owning a home easier and more affordable.

It could also mean getting into your own home or securing, an investment property, years earlier than imaginable if a 20 per cent deposit was the only option.

Imagine how long it could take some would-be buyers to stump up a 20 per cent deposit on the average $600,000 Sydney home? That's a sum of $120,000 on top of all the other expenses associated with buying a house.

By reducing the deposit required, many borrowers are able to purchase a home much earlier, or buy a better property than they would otherwise have been able to afford.

Alternatively for property investors, lenders mortgage insurance allows borrowers to have higher borrowing ratios, giving them the opportunity to maximise negative gearing benefits.

LMI premiums are calculated on the amount that you borrow – and as you'd imagine, the higher percentage loan the higher the premium. But the good news is that the LMI premium can often be capitalised into the overall loan, thereby reducing upfront costs.

It's important to bear in mind that the higher the loan amount you take out, the bigger the repayments. It's essential that you think carefully about what your monthly budget can accommodate to ensure that you don't over stretch yourself.

If you have any questions or would like further details please don’t hesitate to give me a call.

<Disclaimer>

This article does not necessarily reflect the opinion of the author/s, Carruthers Financial Services Pty Ltd or any of its employees or subsidiaries. It is intended to provide general news and information only. While every care has been taken to ensure the accuracy of the information it contains, neither the author/s, Carruthers Financial Services officers, employees, or its subsidiaries, can be held liable for any inaccuracies, errors or omission. Copyright is reserved throughout. No part of this article can be reproduced or reprinted without the express permission of Carruthers Financial Services Pty Ltd. All information is current as per the date of delivery and Carruthers Financial Services Pty Ltd  will take no responsibility for any factors that may change thereafter. All readers thereafter are advised to contact their financial adviser, broker or accountant before making any investment decisions and should not rely on this article as a substitute for professional advice.


 
David Carruthers is a credit representative (Credit Representative Number [400226]) of BLSSA Pty Ltd (Australian Credit Licence No. 391237).