When applying for a home loan with less than a 20% deposit, you'll likely encounter lenders mortgage insurance (LMI). This insurance protects lenders when your loan to value ratio (LVR) exceeds 80%, but understanding how it works is crucial for your financial situation.
What Is Lenders Mortgage Insurance?
Lenders mortgage insurance is a one-off premium paid by borrowers when their deposit is less than 20% of the property's value. This insurance protects the lender, not you as the borrower, if you default on your loan repayments.
The cost varies based on several factors:
• Your loan amount and deposit size
• The property type and location
• Your borrowing capacity and credit history
• Whether you're buying an established home or building
MLN Finance can access Home Loan options from banks and lenders across Australia, each with different LMI policies and pricing structures.
How LMI Affects Your Home Loan Application
When you apply for a home loan with a deposit under 20%, lenders calculate your LVR to determine if LMI is required. For example, if you're buying a home worth $600,000 with a $90,000 deposit, your LVR is 85%, triggering LMI requirements.
The application process involves:
- Providing bank statements and financial documentation
- Property valuation to confirm the loan amount
- LMI assessment by the insurance provider
- Final loan approval
This can extend your Home Loan application timeframe, so factor this into your property purchase timeline.
LMI Costs and Payment Options
LMI premiums typically range from 1% to 3% of your loan amount, depending on your LVR. On a $500,000 loan with a 10% deposit, LMI could cost between $15,000 and $20,000.
You have several payment options:
• Pay upfront at settlement
• Capitalise the cost into your loan amount
• Combine both methods
Capitalising LMI means you'll pay interest on this amount over your loan term, increasing your total borrowing costs but reducing upfront expenses alongside stamp duty and other settlement costs.
Interest Rate Considerations
Your interest rate - whether variable interest rate or fixed interest rate - affects how LMI costs compound over time if capitalised. When calculating home loan repayments, include capitalised LMI in your loan amount.
Some lenders offer interest rate discounts for borrowers with strong financial profiles, even when LMI applies. MLN Finance can help you compare Home Loan Rates across different lenders to find suitable options for your circumstances.
Strategies to Manage LMI
While LMI adds to borrowing costs, several strategies can help:
Get pre-approved early: Home Loan pre-approval helps you understand total costs, including LMI, before making purchase decisions.
Consider family guarantees: Some lenders waive LMI when family members use their home equity as additional security.
Professional packages: Certain occupations may qualify for LMI waivers or discounts through professional packages.
First home buyer schemes: Various state and federal programs can reduce or eliminate LMI for eligible buyers.
Making Informed Decisions
LMI shouldn't automatically deter you from buying a home with a smaller deposit. In rising property markets, waiting to save a 20% deposit might mean higher property prices offset any LMI savings.
Consider these factors:
• Current variable home loan rates and fixed interest rate home loan options
• Your ability to service repayments comfortably
• Long-term property market outlook in your area
• Whether you can utilise offset account features to reduce interest costs
A streamlined application process through experienced brokers can help you understand all costs upfront, ensuring no surprises at settlement.
Professional Guidance Matters
Every financial situation is unique, and LMI implications vary between lenders. MLN Finance works with multiple banks and lenders across Australia, providing access to various Home Loan options tailored to your circumstances.
Our team can help you compare LMI costs, interest rates, and loan features to make informed decisions about your home purchase. We'll guide you through the entire process, from initial assessment to settlement.
Call one of our team or book an appointment at a time that works for you to discuss your Home Loan options and understand how LMI affects your borrowing capacity and overall home buying strategy.