Certain risks are associated with being a lender, including loans not getting paid at the due time or at all, which can make you lose money. Lenders Mortgage Insurance, or LMI, protects you from such situations or risks. This post will provide information on Lender’s Mortgage Insurance, the benefits, how it works, and how LMI is calculated. Read on, as we’ve got you covered.
What is Lenders Mortgage Insurance?
Lenders mortgage insurance is an insurance that shields a lender from the risk of losing money due to the inability of a borrower to settle or meet a loan payment. LMI is a one-off payment added to the borrower’s total loan amount and paid with the loan repayment or paid in full at the loan settlement period. It is important to note that Lender’s Mortgage Insurance covers the Lender from financial loss, not the borrower.
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Benefits of Lenders mortgage insurance
Despite protecting the Lender, LMI has some other benefits. Some of the benefits of a Lender’s mortgage insurance include the following;
- LMI covers a lender from the risk of financial loss
- It gives low-income borrowers with trouble getting a home loan access to home ownership.
- A borrower without the 20% deposit of a property’s purchase price required by lenders can quickly obtain a home loan because of the Lender’s mortgage insurance.
How much does Lender’s mortgage insurance cost?
The exact cost of a lender’s mortgage insurance is only ascertained if a lender and a property are chosen. However, LMI cost depends on factors like the Lender, the type of loan, the loan amount or size of the deposit, and the percentage of the property value. Also, the premium can differ based on the source of your contribution, whether it’s from actual savings or other sources like a gift. During the application process for a home loan, your broker will guide you on estimating how much Lender’s mortgage insurance you need to pay.
How to calculate Lender’s mortgage insurance
Lender Mortgage Insurance is calculated as a ratio of the loan amount. The borrower’s fee rises as the loan amount and Loan to Value Ratio increase. Also, your LMI will vary based on the money you intend to borrow and your Loan to Value Ratio (LVR).
How to minimize or avoid lenders’ mortgage insurance
There are different ways a borrower can avoid paying for LMI. They can include the following;
- Apply with specific lenders: Lenders can sometimes give discounts to borrowers or ignore LMI fees. Therefore, you should consider comparing different loans.
- Profession: working in specific professions that are highly regarded, such as lawyers, doctors, nurses, accountants, etc., can make lenders waive LMI as you are considered to be well-paid and stable to settle loan payments.
- Quality guarantor: Many lenders tend to ignore LMI on the loan if the borrower has the support of a quality guarantor that legally admits to being accountable for the mortgage repayments if the borrower defaults.
- Government grant: Getting grants from the government lets home buyers acquire a property with a lower deposit, and their LMI is taken care of by the government.
- A borrower can avoid LMI by saving up the 20% deposit of the property value the Lender requires.
When applying for a home loan, understand how the Lender’s mortgage insurance works. Keep in mind that LMI protects just the Lender and not you. If you can generate a 20% deposit of a property purchase value, you won’t need to pay LMI. Note that the Lender makes LMI arrangements, so you don’t need to sort it out yourself, and finally, LMI is not transferable.