With home costs in Australia on the rise, it can often be difficult for those who wish to purchase a home to come up with the 20-percent deposit they need to secure a home loan. However, it is possible to obtain a mortgage with a lower down payment if you are willing to pay lenders mortgage insurance (LMI). The primary purpose of LMI is to protect the lender that issues your mortgage. It covers them in the event that you are unable to make your repayments so that they don’t suffer a major loss on your behalf.
When do I need to pay for LMI?
You’ll be required to pay LMI any time you purchase a home with less than 20 percent for a down payment. You’ll still need to have a deposit of at least 5 percent of the property’s value in order to qualify for a mortgage, but this amount is much more attainable than 20 percent, especially for more expensive homes. You’ll have the option of paying a one-time fee up front or rolling the LMI costs into your mortgage, slightly increasing your monthly repayments.
The specific cost of LMI for your loan will vary, depending on a number of factors. This includes the purchase price of your home, the amount of your down payment, and the amount of your mortgage. In general, the more expensive your property and the lower your down payment, the more you will have to pay for LMI.
How to avoid LMI?
The best way to avoid LMI is to come up with the standard 20-percent down payment before buying a home. Although this is undoubtedly easier said than done, it will assure your lender that you are a responsible borrower and can repay your mortgage. Some Australians are asking their parents to act as guarantor, putting their own home’s equity up as security for a guarantor loan. With this type of home loan, you can avoid paying LMI, even without the full 20-percent deposit.
If your financial situation improves and you are able to refinance your mortgage within the first two years of the loan, and can now meet the 20-percent threshold, you may be eligible for a partial refund of your previous LMI payments. If, on the other hand, you wish to refinance and still have not passed the 20-percent equity level, you will have to pay LMI again for the new loan. If you intend to refinance, it is best to wait until you have built up enough equity in your property so that you won’t have to pay LMI a second time.