When it comes to purchasing a property, there are several other costs besides the purchase price home and stamp duty that buyers should be aware of.
When you research home loans, you may come across terms like LMI. It can be quite confusing not knowing exactly what it actually is. So what is LMI?
Lenders mortgage insurance (LMI) is a one off payment and has a purpose of protecting the lender in the event that you default on your mortgage. It does not provide any protection for you, the borrower. Lenders usually take out this insurance when they are lending more than 80% of the value of the property and it enables them to take on this higher risk. The premium is usually passed onto you and added to the loan amount, and can add to thousands of dollars. The higher the percentage of the loan compared to the value of the property the more you will have to pay for LMI.
Unlike some extra costs, it is possible to avoid paying lenders mortgage insurance. Firstly, you will need to save a deposit or have equity which equals 20% or more of the purchase price plus extra funds for costs like stamp duty and solicitors fees. Some lenders may have different requirements when it comes to LMI, so you will need to check with your lender about how much you will need.
Secondly, you can have someone be a security guarantor for your home loan. By offering their property as additional security the lender then has sufficient equity to lend at 80%, even though you don’t own this property. These types of guarantees are typically offered by a family member like a parent as a way to help their children get a foothold into the property market and avoid mortgage insurance if they haven’t saved a 20% deposit. The guarantor is allowing you to use the title to their property or their equity. It can make it difficult down the track if they wish to use this equity themselves or if they want to sell the property.
However, lenders mortgage insurance doesn’t always have to be a bad thing. According to the Genworth Homebuyer Confidence Index (September 2014), saving for a deposit is one of the biggest hurdles for prospective first home buyers (35%). So, if there are great property opportunities in the market, this one off payment can help first home buyers get their foot in the door instead of spending the next few years trying to save for a bigger deposit.
But remember, what may work for others may not work for you, so it is important to consider your own situation before making any big decisions.