What first home owners need to know about mortgage insurance
What is Lenders Mortgage Insurance?
Lenders mortgage insurance (LMI) is usually only applicable if you are borrowing more than 80 per cent of the purchase price. LMI is in place to protect the lender, not the borrower. In the event that you default on your loan, the insurance covers the lender for any short fall of the borrower. First time buyers benefit because it allows them to buy first homes sooner with a smaller deposit.
While Lender’s Mortgage Insurance is not mandatory, most lenders will require it if you are borrowing more than 80 per cent of the property’s value. Some lenders may waive all or part of the LIM fee if they really want to secure you as a customer, however the best way to avoid the insurance costs is to save more for your deposit.
If you do not have a 20% deposit you need to ask how much the lenders insurance will be. In some cases this can cost you as much as $2,000 so ensure you know how much you will need to pay before you sign up.
While it may seem like you are paying insurance to benefit somebody else, in fact it makes owning a home more affordable. Because the lender can cover their risk, they are more willing to lend up to 95 percent, even, in some cases, 97 percent of your property's value.
Why Do Lenders Charge This Fee?
It’s all related to funding because if the loan is insured, it is easier for the lender to source the funds.
If the property has to be sold as a result of your default, lender's mortgage insurance (LMI) will cover the lender for any shortfall.
Fees vary according to the amount borrowed and the size of your deposit. In most cases, the LMI premium is charged as an upfront lump sum, however some lenders will allow borrowers to include the fee with the loan repayments. LMI also attracts GST, which is included in the total premium quoted.
Protection for the Borrower
Here’s a little first homebuyer advice: if you want cover so you don't lose your home through inability to meet your mortgage repayments, you need to take out income and mortgage protection insurance. Your personal mortgage protection cover is paid annually and protects you for non-payment through redundancy, illness or if you die. Check your policy to make sure you understand the terms and payment conditions.
Ready to buy your first home and want to know more? Call us today on  and speak to a local mortgage broker.
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