What is Lenders Mortgage Insurance?
About the Author: Otto is a Mortgage Broker that has specialized in mortgage finance for over 6 years. His business The Home Loan Experts is one of Australia’s leading mortgage broking firms.
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Lenders Mortgage Insurance or LMI for short, is a once off fee you pay when you apply for a mortgage that is for more than 80% of the property value. The lender obtains insurance on your loan so that if you default they do not lose any money. The insurance does not cover you as the borrower, yet you still have to pay for the insurance premium!
How much will it cost me?
LMI is calculated on a sliding scale based on the value of the real estate you are offering as security, the size of your loan and also the percentage of the value that you are borrowing. This percentage is known as the Loan to Value Ratio or LVR for short. The larger your home loan and the higher your LVR then the higher the LMI premium will be.
Do I have to save up to pay my LMI?
No, most lenders will allow you to add the premium onto your loan. So if your LMI premium was $3,000 and your loan was $300,000 then the lender would lend you $303,000 so as not to effect the size of the deposit you would need to buy that property.
How can I save on my premium?
By reducing the amount that you borrow as a percentage of the purchase price you can greatly reduce your outlay. Have you asked your parents if they can help you with a larger deposit or if they can guarantee your loan using their home? This is a good first step, as if your loan is for 80% or less of the property value then you will not pay any LMI at all!
Other ways to reduce your premium are to try to borrow less than $500,000 or $300,000 as these are the cut off points where the fee increases dramatically. Also try to borrow less then 95% or 90% LVR as at these two benchmarks the fee will also increase. Did you know there was a $2,300 difference in the premium between a loan of $300,000 and a loan of $300,001? Incredible!
Is there a calculator I can use?
Yes, you can use an LMI calculator to work out the exact cost for your loan. This calculator works for most major lenders such as CBA, ANZ, Westpac, NAB, St George & Suncorp. It compares premiums from the major insurance companies such as Genworth and QBE LMI. Overall it will help you to compare the cost to you and work out if you can save money by applying with a different lender.
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