Lenders Mortgage Insurance
You may have heard the term ‘LMI’…or by its full name - Lenders Mortgage Insurance. Essentially its an insurance premium that you need to pay to help enable you get a home/investment loan if your Loan to Value Ratio (LVR) goes over 80% with most lenders. The sweet spot for most banks and lenders is to give an applicant an 80% loan on the property’s value. As soon as you go over that percentage then banks/lenders feel that the deal is a little bit more risky for them so they go and get insurance to cover themselves in case you default and make YOU pay for it! LMI does NOT give the applicant any protection.
An Example
To give an example: We have Geoff and Emily who have a deposit of $200,000 and are looking to buy a property with a purchase price of $1,000,000. Now some people might think that means the loan will be $800,000 which equals an 80% LVR (when you divide the 800k by 1000k) …hence the couple are not going to be exposed to LMI.
However, some people fail to add to the calculations, the costs associated with a purchase of property. This includes Stamp Duty, Conveyancer charges, other Govt charges for registering the mortgage, booking in settlement & pro-rata charges for Council Rates etc. In this scenario Geoff and Emily should allow for approximately $45,000 in costs (based on a NSW purchase). So in effect they only have a deposit of $155,000 which means that their LVR will be 84.5%.
The Cost
As the LVR has gone over 80%, LMI will now be applicable and the ‘once only‘ payment would be approximately $10,550. This is then capitalised into the loan for most people.