As a first home buyer, you’ve no doubt got questions about the home buying process. How much deposit you need. What the lending criteria are. Using your KiwiSaver or the HomeStart Grant. There’s an awful lot of information to process and it’s understandable you might even feel a little overwhelmed. To help you navigate buying your first home, we’re outlining one of the costs you need to factor in when applying for a high LVR loan: Lenders’ Mortgage Insurance.
What is LMI?
LMI, or Lenders’ Mortgage Insurance, is a one-off insurance premium that you’ll be required to pay to your lender if you’re applying for a loan above 80% of the security value of the property you’re purchasing. It’s an insurance policy that protects your bank or lending institution against any financial loss in the event you’re unable to repay your home loan.
In many cases, if you’re applying for a high LVR loan (low deposit loan), your bank will make it a condition of borrowing that you pay LMI. Low deposit means a deposit of less than 20% as a first home buyer, and as an investor less than 30% (depending on your location).
Do I have to pay LMI?
The following are perceived risk factors that determine whether your lender will charge you LMI.
- How big your deposit is.
- Whether you are a first home buyer.
- Whether the property you’re buying is for investment or is owner-occupied.
- Which insurance your lender uses.
- Whether you’re employed or self-employed.
How much is LMI?
Costs can vary between lenders but there are two ways in which LMI is charged – either a set dollar rate (LMI fee) or a percentage of your loan amount (LMI charge).
How is LMI paid?
LMI is either paid for up front in cash or added to the life of your loan, depending on your lender’s requirements. Remember, if you do add the premium onto your mortgage, you’ll be paying interest on the additional amount for the life of your loan – a massive additional cost. As LMI can be a huge cost (potentially several thousand dollars), it may pay to spend a little longer saving for a larger deposit to avoid this cost.
Is LMI the same as mortgage protection insurance?
Lenders Mortgage Insurance is not the same as a mortgage protection insurance, which is an optional insurance that you take out to cover your monthly repayments should you get sick, disabled or die, or become unemployed and no longer able to meet your mortgage repayments. Unlike a mortgage protection insurance, LMI is not optional and you will be required to pay it if you’re unable to raise a 20% deposit.
How do I avoid paying LMI?
Key to avoiding paying LMI is saving a larger deposit – you’ll need a deposit of at least 20% of the purchase price of the property you intend buying. However, in today’s volatile property market, you’ll need to weigh up waiting a few months in order to save and possibly missing out on a well-priced property, versus getting into the property market earlier but factoring in the cost of LMI. It’s worthwhile discussing your options with your mortgage adviser before making any decisions.
If you’re still uncertain whether you’d be required to pay LMI when applying for a home loan, get in touch with a Mortgage Express adviser to talk through your options and to help you find the right financial package to suit your specific needs.
While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Mortgage Express Limited for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication.
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