What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance is the insurance that the home buyer pays to protect the lender in the case where the buyer defaults on their home loan. This, however, is usually only applicable when a home typically when a buyer borrows in excess of 80% of the purchase price. This is arranged during the loan approval process by your lender or bank.
Should I buy now or save a larger deposit?
Down payments for a house are a huge cost, it can take several years to save up the amount you need. This leaves many buyers wondering whether it is better to buy now, resulting in a larger LMI premium, or to save a little more?
The answer is really just a matter of preference. It depends only on whether you want to pay more for the LMI now so you can buy your home sooner, or wait a little longer and pay a bit less.
Each lender has they own specific LMI rates as they have different clients with different risks. The difference between lenders can be significant so at Orange Mortgage and Finance Brokers, our calculations will also including checking if it is cheaper to use different lenders based on their LMI cost.
LMI rates are not linear. They increase by the LVR and also by loan size.
The LMI rates looks like a step function which has big increases at 85%, 88%, 90% 92% and 95%.
Why is the 88.0% LVR level important?
In general, you would benefit from having an LVR starting at 88.0% because you get more favourable pricing with more lenders. However, there are a number of lenders at the moment who are giving favourable pricing to First Home Buyers so you would not be disadvantaged from having an 88.0% versus a 90.0% LVR loan. The main difference for you would be the difference in Lenders Mortgage Insurance cost at the difference LVR levels.
Assume you purchase a $500,000 house to live in.
Below is a table of the difference loan amounts, LVR and LMI estimates.
|Loan amount||LVR||LMI Estimate|