| Lenders Mortgage Insurance (L.M.I.) Explained
Lenders Mortgage Insurance (LMI) is an insurance policy that your home loan lender takes out to protect themselves in case you default on the loan. LMI is usually dependent on your “loan to value” ratio, which is your deposit amount in relation to the property value.
To calculate your LTV ratio, divide the total mortgage loan amount into the total purchase price of the home. For example, a home with a purchase price of $1 million and a total mortgage loan for $800,000 results in an LTV ratio of 80%.
Other risk factors that may require LMI include not having proof of income, unstable employment history, imperfect credit history, no savings record, a low doc loan, or buying property off the plan.
The best way to avoid LMI is to have a deposit of 20% or more of the property purchase price. However, you may also be able to avoid paying LMI if you can qualify as a “high quality” low-risk borrower with secure full-time employment, stable housing history, a history of genuine savings, and a clean credit file.
LMI is a cost that your lender will pass on to you, usually as a one-off fee when setting up your home loan. The upside of LMI is that it may enable you to purchase a home sooner with a lower deposit. By doing so, the capital gains that you may make could outweigh the costs of LMI. Some lenders may even allow you to borrow up to 95% of the purchase price.
In conclusion, LMI is an important consideration when applying for a home loan, but it’s not necessarily a barrier to homeownership. With careful planning and a strong financial position, you can still achieve your dream of owning a home.
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