Lender's Mortgage Insurance: Your Test Match Preparation
Updated: 1 day ago
Buying a house can be a lot like managing conditions in a cricket test match. Conditions in property play a big part; market demand, interest rates, other bidders that turn up on the day of the auction - think of them as the fast bowlers! Just like cricketers spend a lot of time analysing the pitch, the weather, and the opposition, as a buyer it pays to be prepared and consider all options. Mortgage rates, bank lending criteria, available grants, and incentives, all need to be looked at when seeking pre-approval for finance. A valuable and sometimes undervalued condition when it comes to securing a home loan is Lender's Mortgage Insurance. Just like no opening batsman would walk out to face a pace attack without their helmet, Mortgage insurance ensures that you as a buyer can comfortably take the middle and start scoring runs immediately.
What is Lender's Mortgage Insurance?
Lenders mortgage insurance (LMI) refers to a form of insurance that finance lenders take to protect themselves in the event that a loan can’t be repaid. The cost of LMI will vary depending on the deposit and loan amount and can either be paid upfront or added to a loan amount. If a deposit is less than 20% of the value of the house(the Loan to Value Ratio or LVR) a buyer is seeking to purchase, most lenders in Australia will require that you pay LMI.
Planning the long game with LMI
Often, we are told that Lender's Mortgage Insurance is something to be avoided. The reality is that with strict lending criteria the ability to meet certain requirements to qualify for not needing LMI can be difficult to avoid. Considering how long it might take to save up the full amount required for the deposit, versus the cost of the LMI against the potential growth of the property a buyer has their eye on, LMI could in fact be a small price to pay.
How the LMI scorecard works
Banks and non-bank lenders require a buyer to show that you have saved a minimum of 5% of the property value, but this isn’t enough to complete the purchase
Why 5%? Lenders need to see that a buyer has the propensity to save. Generally, this needs to be demonstrated over a 3 months term. A buyer can therefore have:
Cash sitting in an account for 3 months that’s equal to or greater than 5%
Own shared shares that are valued at equal or greater than 5%
Gradually saved up funds over a longer period that now equals 5%
A bank or non-bank lender will only lend 95% of the purchase price. Below are 2 examples; one for a first home buyer, where they have no stamp duty costs, and the other is a home buyer. Key points:
LMI is different when purchasing a first home, rather than just a home.
The contribution will be higher if the buyer is not a first home buyer due to overall costs
Example 1 – First Home Buyer (Funds required 8.55% required)
Example 2 – Standard Home Buyer (Funds required 10.55% required)
As you can see the overall difference equates to approximately $10 000 in contribution costs. Both scenarios here have been worked out based on a 5% deposit with an overall LMI fee of around $14 000, which can usually be paid either upfront or as part of your ongoing mortgage repayment. As a mortgage broker, we’re able to talk your buyer through the different scenarios available, as well as any other government grants or incentives that may be available.
If this is something that you think your buyers could be interested in, then consider making the introduction and we’ll do the rest. Maybe a little like a twelfth man but either way, here to see in the century!
Astute Financial Management Pty Ltd | ACN 093 587 010 | Australian Credit Licence 364253 | Davgan Insurance & Wealth Pty. Ltd. T/As Astute East Brisbane Corporate Authorised Representative (425641) of Alliance Wealth Pty Ltd | ABN 93 161 647 007 | AFSL 449221. www.centrepointalliance.com.au/aw | General Insurance provided by Astute Insurance Pty Ltd | ABN 59 622 582 236 | Authorised Representative of Ausure Pty Ltd ABN 94 096 971 854 AFSL 238433. Health Insurance products are underwritten by St Luke’s Medical and Hospital Benefits Association ACN 009 479 618 (St.LukesHealth), a registered private health insurer, [trading as Astute Simplicity Health] and members are introduced by Astute Financial Management Pty Ltd or related entities (collectively known as Astute) for which Astute receives a commission.
General Advice Warning: This communication contains general information only and in no way constitutes the provision of professional advice, nor should it be relied on as a substitute for financial, credit, accounting, legal or other professional advice. We have not taken into account your financial situation, investment objectives or particular needs. Before making an investment or financial decision, a person must seek appropriate independent professional advice and also consider whether this information is appropriate to their needs, objectives and circumstances. The author as well as their representatives, agents and employees give no guarantees and make no representations, express or implied, as to the accuracy, currency, completeness or suitability of the information contained in this document. Nor do they accept any liability whatsoever as a result of any information herein being incorrect, incomplete or unsuitable or as a result of a person in any way using or relying on the information herein.