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Lender’s Mortgage Insurance (abbreviated to “LMI”) protects THE LENDER in the event that you default on your loan and the proceeds from the sale of your property do not cover the outstanding value of your loan. LMI will meet any shortfall for the lender.

LMI should not be confused with Mortgage Protection Insurance, which covers YOU for the payment of your mortgage installments in the event of unforeseen circumstances including unemployment, illness or death.

As a general rule (note there are exceptions), if as a buyer you borrow more than 80 percent of what the lender considers to be the value of the property, you will be asked to pay LMI. Taking out LMI greatly reduces the lender’s risk of loss and the associated cost of the LMI is subsequently passed on to the borrower. It is usually charged as a one-off premium and is calculated on a sliding scale.

The greater the LVR as a percentage of the amount you borrow to the property value and the more money you borrow, the higher the mortgage insurance premium payable.

Ultimately, LMI gives many home buyers or investors the benefit of accessing the property market sooner, than if they had needed to save for a deposit.

By reducing the deposit required and helping to minimise lending interest rates, many borrowers are able to purchase a home much earlier, or buy a better property, than they would otherwise have been able to afford before LMI.

For property investors, LMI allows borrowers to have higher borrowing ratios, giving them the opportunity maximize negative gearing benefits.

The table below shows an estimate of the cost of mortgage insurance for different scenarios:

 

Value of Property

 

Amount of LoanLVREstimated Cost of Mortgage Insurance*

 

 

$275,000

$261,25095%$4520
$247,50090%$2800
$233,75085%$1780
$220,00080%NIL
 

$300,000

$285,00095%$4930
$270,00090%$3050
$255,00085%$1940
$240,00080%NIL
*Estimates only – final amount will depend on the current policy of the mortgage insurer, your individual risk as the borrower and the overall size of the loan.

If you belong to a certain profession or your income is above a stipulated threshold amount, it may be possible to have mortgage insurance waived.  Just be careful that the loan product you are using does not have this cost indirectly included by being hidden in fees, additional charges, higher interest rates or capitalised in the loan.

Your mortgage broker or advisor should be able to help you with this. Also if you refinance your loan within 12months it may be possible to get a pro rata refund of your mortgage insurance. This will depend on your lenders policy.  Of course the above is just a general outline and you need to seek advise from your mortgage broker/financial advisor before making any decisions.

Property Friends is a specialist Property Investment Advocacy that has been operating for the last 13 years on the basis of 3 principles: Trust, Community & Progress. www.propertyfriends.com.au (03) 9758 5331

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Uwe Jacobs Property Strategist

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