LMI

What is LMI?

LMI stands for Lender’s Mortgage Insurance. It is effectively and insurance policy your lender (bank, building society, financial institution) takes out if your loan is deemed to be “high risk”. Mostly this comes into play when you don’t put down 20% of the purchase price. This insurance policy protects the lender if you can’t meet your mortgage repayments. Here’s what you need to know:

When is LMI Paid?

LMI is a lump sum paid when the property settles (key handover). Lenders will often offer to have this fee built into your loan amount. This means you do not have to come up with the cash upfront however your repayments will be higher and you are effectively being charged interest on your LMI fee along with your loan as it is built into your mortgage.

How much is it?

Unfortunately, the answer is – It depends... The size of the loan, size of your deposit and your individual circumstances. LMI can decrease exponentially with a larger deposit closer to 20%. Therefore, a lower deposit may mean your LMI fee is much higher.

How can you avoid it?

In simple, save a larger deposit. Keep in mind you will have purchasing costs on top of your deposit such as stamp duty, legal fees, etc. So it may be necessary to actually have more than 20% cash in the bank when purchasing if you wish to avoid LMI. There are also certain occupations that banks recognise that can potentially avoid LMI. So it is important to disclose your job.

Should I avoid it?

It all depends on your circumstances, goals, risk appetite, etc. Saving a larger deposit will not only avoid LMI but can also improve cashflow (if its an investment) and reduce your risk profile as there is a buffer if the value of the property drops. There is the risk however that waiting to save a larger deposit may mean you actually end up paying more as prices have risen during that time. It is therefore to consider market direction when making this decision.

LMI – Avoid it where possible. Embrace it when you have to.

- The Tattooed Investor