When trying to break into the property market, saving a 20% deposit can be almost impossible. That’s where lenders’ mortgage insurance (LMI) comes in, but it comes at a cost..
What is LMI?
LMI, or Lenders’ Mortgage Insurance, is a cost that many home buyers must endure if they haven’t saved a 20% deposit. In a nutshell, Lenders Mortgage Insurance is a one-off fee charged by the Lender to you when you need to borrow more than 80% of the value of the property.
It is insurance that a lender takes out to insure itself against the risk of not recovering the full loan balance if the borrower (you) were unable to meet loan repayments.
It’s important to remember that LMI doesn’t insure you if you can’t make repayments. It insures the bank.
Bob and Jill have found a home they want to buy for $500,000. Typically, they would need a 20% deposit ($100,000) to secure a loan from their lender. By taking out Lenders Mortgage Insurance, their lender is prepared to provide a loan up to 95% of the value of the home.
This means that Bob and Jill can secure a home loan sooner with a 5% deposit ($25,000) and stop paying rent. Their lender passes on the Lenders Mortgage Insurance premium cost to Bob and Jill by way of a fee called a “premium”.
The Lenders Mortgage Insurance protects the lender if Bob and Jill default on their loan repayments
– it does not protect Bob and Jill.
Benefits of Lenders Mortgage Insurance
- The benefit of LMI is it allows lenders to provide home loans to customers who do not have a substantial deposit but would otherwise meet the lenders credit requirements.
- LMI covers the outstanding balance of the loan owing to the lender if the sale of the property does not cover the total loan amount.
When to consider comparison rates
There is basically no bad time to look at the comparison rate for home loans. There are two major reasons you would look at the comparison rate, and those are:
- Buying a home and looking for a mortgage provider
- Considering refinancing your home loan for a better deal
A comparison rate is a useful tool for both situations because you’ll be able to carefully determine which loan is the cheapest overall.
However, bear in mind that the comparison rate is used to determine the overall cost of a loan. The cheapest long-term loan may not suit your individual needs and financial goals right now. That’s why it’s always worth consulting a professional broker before jumping into any new home loan.
For example, you might find a home loan with a great comparison rate. It will save you money over 30 years. But let’s say you want to start a family soon. Or you’re saving for a holiday. If you need more money free for other things right now, then the best loan will be one that ensures lower repayments in the short term. Whether that’s an interest-only loan or a fixed-rate loan that switches to variable in a few years – there are several examples out there.
Is a comparison rate foolproof?
As you can see, personal circumstances, financial goals, family goals and all other aspects of life can influence your choice of home loan. So, in that sense, comparison rates isn’t foolproof. If it was, everybody would rush to the loan with the best comparison rate and all other lenders would collapse. (A bit extreme, but you get the point.)
When looking at comparison rates, always read the fine print because that tells you everything that the rate takes into account. Home loans have various features such as offset accounts, so you need to consider all of those other aspects when deciding on the loan that’s right for you.
How can BrokerCo help?
BrokerCo provides a fully personalised, tailored service to help you achieve your home ownership dreams. If you’re struggling to break into the market, we’d love to talk to you and discuss your needs.
Our professional brokers look at your current circumstances as well as your future property or financial goals. From there, we find the very best home loan solution to suit your individual needs. To find out why people love BrokerCo, contact our team today.