When applying for a home loan in Hastings, understanding lenders mortgage insurance (LMI) can significantly impact your financial situation and borrowing capacity. This insurance protects lenders when borrowers have a deposit less than 20% of the property's value, but the cost is typically passed on to you as the borrower.
What is Lenders Mortgage Insurance?
Lenders mortgage insurance is a one-off premium that banks and lenders across Australia require when your loan to value ratio (LVR) exceeds 80%. If you're buying a home worth $600,000 with a $480,000 loan amount, your LVR is 80% and you'll avoid LMI. However, with a $510,000 loan on the same property, your LVR becomes 85% and LMI applies.
The insurance protects the lender if you default on your mortgage, but you pay the premium. LMI costs vary based on:
• Your loan amount
• The loan to value ratio
• Your deposit size
• The lender's pricing structure
When Does LMI Apply?
Most lenders require LMI when your deposit is less than 20% of the property's purchase price. However, some specialised Home Loan options from certain lenders may have different thresholds. The property market in Hastings means many buyers face LMI, particularly first home buyers who may struggle to save a full 20% deposit while also covering stamp duty and other costs.
Some professions, including medical practitioners, lawyers, and accountants, may access reduced LMI rates or higher LVR thresholds through professional packages offered by various banks and lenders.
Calculating LMI Costs
LMI premiums typically range from 1% to 3% of your loan amount, though this varies significantly based on your LVR. For a $500,000 loan with a 90% LVR, you might pay between $8,000 and $15,000 in LMI premiums.
When calculating home loan repayments, you can either:
• Pay the LMI premium upfront at settlement
• Add it to your loan amount and pay interest on it over the loan term
• Combine both options depending on your financial situation
Adding LMI to your loan amount means you'll pay interest on this amount throughout your mortgage term, whether you choose a fixed interest rate home loan or variable home loan rates.
Strategies to Manage LMI
While you cannot avoid LMI with a deposit under 20%, several strategies can help manage the cost:
Consider Different Lenders: Various banks and lenders have different LMI pricing structures. Some may offer more competitive premiums for your specific loan to value ratio.
Professional Packages: If you qualify for professional packages, you may access reduced LMI rates or higher borrowing limits.
Family Guarantee: Some Home Loan options allow family members to use their home equity as additional security, potentially reducing or eliminating LMI requirements.
Offset Account Benefits: While not directly reducing LMI, an offset account can help you pay down your mortgage faster, moving you away from the LVR threshold that requires LMI more quickly.
The Home Loan Application Process with LMI
When you apply for a home loan that requires LMI, the application process includes additional steps. Lenders will assess your borrowing capacity and review your banks statements more thoroughly, as higher LVR loans represent increased risk.
Getting pre-approved becomes particularly valuable when LMI applies. Home Loan pre-approval gives you certainty about your borrowing capacity and the total cost of your loan, including LMI premiums.
The streamlined application process offered by experienced mortgage brokers can help identify lenders with competitive LMI rates and negotiate potential interest rate discounts that may offset some LMI costs.
Fixed vs Variable Rates with LMI
Whether you choose a fixed interest rate home loan or variable interest rate doesn't directly impact your LMI premium. However, your choice affects your overall mortgage costs:
• Variable rates may offer offset account facilities and additional repayment flexibility
• Fixed rates provide repayment certainty, making budgeting easier when you're also paying for LMI
Many borrowers in Hastings opt for split loans, combining both fixed and variable portions to balance security and flexibility.
Working with Hastings Mortgage Specialists
Non-bank lenders and smaller institutions sometimes offer competitive LMI rates compared to major banks. As a mortgage broker in Hastings, Abundance Home Loans can access Home Loan options from banks and lenders across Australia, comparing LMI costs alongside home loan interest rates to find suitable solutions.
Our team understands the local property market and can guide first home buyers through the complexities of LMI while exploring strategies to minimise long-term costs.
Lenders mortgage insurance shouldn't prevent you from buying a home in Hastings. With proper planning and professional guidance, you can manage LMI costs effectively while securing the right mortgage for your circumstances. Call one of our team or book an appointment at a time that works for you to explore your options and develop a strategy tailored to your financial situation.
