The low-down on lenders’ mortgage insurance

If you find the perfect place but your savings aren’t quite 20% of the property purchase price, lenders’ mortgage insurance (LMI) could help get you over the line when getting a home loan. So let’s take a look at what it means and when you might use it.

What, exactly, is LMI?

LMI is an insurance that protects the lender in case you default on your home loan, and the property sale isn’t high enough to cover what you owe. You pay the cost of the insurance, either upfront or finance it under your loan.

With LMI, lenders may let you borrow with a smaller deposit (as low as 5% for many lenders). So if you’re feeling as though that 20% deposit is simply taking too long to save, LMI could be your ticket into home ownership.

How much does it cost?

A few things affect how much LMI you might have to pay. The two main factors are:

• The size of the home loan you’re after
• The size of your deposit
• The value of the property.

Also worth noting is that:

• a larger loan will increase the cost of LMI – as will a smaller deposit
• depending on the insurer, the premiums could be affected by whether you plan to live in the property or rent it out, and whether you work full-time or casual
• and like any insurance, the premiums can vary from one insurer to the next.

Given that everyone’s situation is different and there are so many variables at play, we can’t say exactly how much LMI might cost for you. Your best bet is to ask for an LMI estimate when you speak to your lender.

On the matter of paying, most lenders let you add the cost of LMI to your home loan – you don’t need to pay for it upfront. Just be aware that, if it’s tacked on to your home loan, then you’ll pay interest on the LMI for the term of your loan, and you’ll be able to contribute less of your loan amount to the actual purchase price of the house.

Why pay LMI?

Think of LMI as a potential pathway into home ownership a little earlier. Yes, it’s an added cost on your home loan, but it could mean that you jump onto the ladder before property prices surge skywards again.

For many first home buyers, it’s a matter of weighing up whether the cost of LMI will be less than the cost and effort of saving up that 20% deposit. And given the unpredictable nature of the property market, there’s no black-and-white answer. Sometimes, paying LMI and buying a property sooner will pay off in the long run – sometimes, it may not.

You’ll need to consider your personal pros and cons for LMI before you decide whether you want to bite the bullet and pay for it, or keep on saving.