With property prices in Australia rapidly increasing, saving enough money for a good deposit on a home loan is becoming more and more difficult. Lenders in Australia prefer a deposit of 20% of the property value but if that figure is out of your league, there are other options. Lenders Mortgage Insurance allows you to have a smaller deposit and still get a home loan.
In most circumstances you can get a home loan with just 5% deposit, but you will need to pay Lenders Mortgage Insurance (LMI). Lenders Mortgage Insurance is a one off fee paid as insurance with any loan when you borrow more than 80% of the property value. It protects the lender if for some reason, you are not able to continue making repayments on your loan. Lenders’ Mortgage Insurance gives the lenders the ability to provide home loans to more people by reducing the level of risk. It means that a larger amount of Australian’s are able to get a loan and the home they want sooner.
What does Lenders Mortgage Insurance ( LMI ) cover?
Lenders’ Mortgage Insurance does not protect you as the borrower, it protects your lender in case you default on your home loan. When a lenders provides a home loan, there is always a risk that they won’t get the money back if for some reason, you are not able to meet the repayments. Although the lender has the property as security, if property values decline that security may not be enough to cover the balance of your loan if the lender has to sell it.
Paying Lenders Mortgage Insurance
Lenders’ Mortgage Insurance is a once off fee that is payable when your loan settles. Most lenders allow this fee to be added to your total loan amount so you don’t have to save for it in addition to your deposit. This spreads the cost of the insurance over the loan as a whole. The actual cost of Lenders’ Mortgage Insurance will vary depending on how much money you borrow ,the size of your deposit, the value of your property and the property location. An Assured Lending Mortgage Broker can advise you how much Lenders Mortgage Insurance you will need to pay.
How to avoid paying Lenders Mortgage Insurance
There are only two ways to avoid paying Lenders Mortgage Insurance. The first is to save 20% or more deposit and the second is to have someone go guarantor on your loan. A guarantor loan is when you have your loan guaranteed by someone else, usually a family member. This gives you the option to borrow more than the value of a property to cover expenses. The guarantor is not liable for the full amount of the loan, only an agreed amount. Security for this guarantee is usually the guarantor’s own property.