Lenders Mortgage Insurance: Our 8 Tips to Better Understand It
In today's video, we talk finance, and specifically lenders mortgage insurance. Here are eight tips to help you better understand this insurance contract.
- What is Lenders Mortgage Insurance (LMI)? - LMI is an insurance contract that's required when you generally have less than 20% deposit to put towards a property. In these circumstances, having less than 20% deems you in the high-risk category where an insurance contract is required.
- Variations in LMI - LMI, like other insurance contracts such as car and home insurance, can vary between providers. Different banks may have a different risk profile for your specific loan, and may charge different LMI premiums. This can be upwards of $3000-$5000, all the way up to $50,000 for different client scenarios. Therefore, it is important to speak to someone who has access to multiple lenders when thinking about LMI.
- Who does LMI protect? - Unlike other insurance contracts where insurance protects you in case you're in an accident or your home is damaged, LMI protects the bank in the event that you default on your mortgage. Therefore, it is important not to confuse LMI as a contract to protect you, the owner, and the borrower of that property.
- Payment Options for LMI - LMI can be added to your mortgage and paid off like your normal principal, which can increase interest. Alternatively, it can be paid out of your own cash. In some instances, banks may charge what's called a risk fee, which is equivalent to LMI pricing.
- What does LMI actually protect? - LMI protects any amounts owed to the bank above the 80% threshold. In a dire situation where you have to sell your property, and the sale price does not meet the actual loan available, LMI kicks in and assists the bank in recouping or buffering the loss of that loan. However, it is important to note that LMI does not affect the whole loan balance.
- Additional Insurance Contracts - It is important to have your own health insurance, home insurance, and even TPD and life insurance to ensure that in any unfortunate circumstance in life, there are other sources of contract that you, the borrower, can call upon to cease paying your mortgage repayments.
- Transferability of LMI - LMI is not transferable between lenders. Once you pay LMI with a certain bank, let's say CBA, and one day if you want to refinance to another bank, and your property value hasn't gone up, you will have to pay LMI again. Therefore, it is essential to understand the risk of getting stuck with a lender for a long time.
- Using a Mortgage Broker to Avoid LMI - As a mortgage broker, we have access to a lot of different lenders, and there are some that can avoid LMI in certain situations. It may depend on your profession, the type of property, or if you are a first-time buyer. Knowing the bank that can help you avoid LMI is valuable because it saves you a ton of money.
Lenders mortgage insurance can be a complicated topic when you are buying a house. Along with that myriad of other things that fly away, it's important to speak to someone who cares enough to go through LMI and really understands who protects what it entails, how much it costs, and are there better options. Therefore, reach out to your mortgage broker because they are the best place to get advice on LMI. If you enjoyed this video, please hit the like or subscribe button. We would really appreciate it.