In this lesson, we discuss mortgage insurance, what is it, and when do you need it?
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Prefer reading? Here is a transcript of the video:
Hello and Welcome. This is Paul Pappas from Mortgage Choice. As a first home buyer, it is quite common that you’ll require lender’s mortgage insurance or, as it’s more commonly known in LMI.
So exactly what is LMI? So lender’s mortgage insurance is insurance whereby you can buy a property with a deposit that is less than 20% or if you’re looking to borrow more than 80% of the value of the property.
There’s a lot of confusion out there as to exactly what LMI is. It is not income protection. It is not life insurance. It is not loan protection that you can purchase as a separate policy in your own name. It simply protects the bank in the event of a loan default if that were to ever occur and what it allows you to do is allow you to get into the property market a lot sooner than what you would otherwise be able to do. In other words, you don’t have to have a 20%. LMI allows you to borrow up to 95% of the value of the property, so a huge advantage as a general rule of thumb the cost of the LMI premium is around 2-4%. Now, that does depend on whether you’re borrowing 81-82% or closer to 95% because obviously the closer to the 95% levels the more you pay and also the dollar amount of the loan.
I suppose what I’m getting at here is this, and that is the riskier it is the transaction is to the lender than the higher the premium. So it can vary, but it is added to the loan, so you’re not paying for it today as such but up to a value of 95%.
How do I avoid mortgage insurance? I mean, no one wants to pay it but how can I avoid it. Well, I suppose the clear one is obvious, and that is that you save 20%, and that will allow you to borrow 80% and avoid the mortgage insurance easier said than done. Obtaining a gift from a family member or getting some kind of support, have a chat to your parents. It is very common for your parent or for parents to provide some kind of assistance.
In some cases, banks will waive mortgage insurance to professionally qualified people. We’re talking here about lawyers, accountants, medical professionals, barristers, and so forth there’s a. There’s a bit of a wide variety of professions that lenders will waive mortgage insurance entirely as a first home buyer. You can get some waivers of mortgage insurance up to 85%. It depends on lenders’ policies. This is something that can change and is new in the marketplace, but as a first-time buyer, some lenders will waive it up to 85%.
There is the federal government’s first home loan deposit scheme that also can work with you to avoid mortgage insurance. The problem with the first home the government’s first home loan deposit scheme is that it has very limited places. They only allocate places every six months, and most of our clients, unfortunately, don’t qualify don’t get to qualify because of the limited number of spaces that the government makes available like I said before, have a chat to your family as well in terms of getting some type of assistance we do have a separate module and video on a family guarantor type situation where your family can assist you that’s if they can’t provide a gift to you.
Look, LMI’s not bad. A lot of people consider it to be bad, and they try and avoid it and try and avoid having to pay. So, they go away and try and save more money. The problem with that is this, and that is that LMI allows you to buy a property in today’s market at today’s prices as opposed to having to wait another year or three before you save money or come up with some other form of a method of avoiding LMI by then the property market’s gone through the roof. So, LMI is not a bad thing, and like I said before, it is very common for first-time buyers to obtain LMI on their first or even second property transaction as always talk to us. Our contact details are here. Thank you for attending!
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