Homebuyers with savings or modest incomes will find that delving into the complicated world of lender mortgage default insurance (LMI) will inevitably be part of their journey to owning a home.
While unpacking LMI, The Loan Company chief executive Simon Kahl said these one-off fees exist to protect lenders entering into financially riskier deals.
He said collateral is typically imposed on people who borrow more than 80% of a property’s value, also known as the loan-to-value ratio (LVR).
“IMT protects the lender against financial loss if the borrower cannot afford to repay their mortgage, so if the borrower defaults on their loan and the sale of the property does not equal the unpaid value of the mortgage, lenders can claim on the LMI policy to make up the difference, ”Mr. Kahl said.
“This is an important feature for lenders because they wouldn’t otherwise be ready to lend beyond an LVR of 80%, which means all borrowers would have to make a deposit of 20%. “
Mr Kahl said most lenders require the customer to hand over at least five percent of the property’s value.
For example, if a property is worth $ 350,000, lenders requiring a 5% deposit would ask customers to pay $ 17,500.
Customers who are unable to pay more than the five percent minimum and request a higher loan amount will often pay a higher premium on mortgage default insurance to offset the increased financial risk assumed by the bank or other lender.
On the flip side, customers who pay a higher deposit, typically closer to 20 percent of a property’s value, will end up with cheaper insurance.
“Likewise, as the amount of a loan decreases, the cost of the LMI premium also decreases,” Mr. Kahl said.
“If customers have a deposit of 20 percent or more, that will usually exclude them from the LMI payment.
“Another option is to ask your parents to act as surety, which removes the mortgage insurance requirement.
“Having a parent as a guarantor not only means you avoid LMI, but you can also get a much better interest rate and your loan is more likely to be approved. “
For homebuyers whose financial situation meets the LMI criteria, Mr. Kahl suggested saving as much money as possible for a deposit.
Customers who are looking for a significant cash flow may consider using a tax return, selling a motor vehicle, or using money donated by family or friends.
Homebuyers who qualify for LMI but don’t want to pay it also have the option of using Keystart, a government-backed lender that specializes in financing homes for first-time homebuyers.
Keystart does not require LMI and allows clients to use the First Home Owner Grant for a competitive 2% deposit.
Mr Kahl said the lending agency’s strict lending criteria meant it wasn’t right for everyone, and to help navigate the options available, he suggested buyers hire a broker. in mortgages.
When enlisted early in the home buying process, Mr. Kahl described brokers as a wealth of free LMI knowledge.
He also said they have proven invaluable in helping clients navigate a variety of financial issues that arise when buying a home.
“They can help you figure out how much you can borrow, find the best interest rate for you, and help you apply for a loan,” Kahl said.
CONTACT The Loan Company, 6461 5444, www.theloanco.com.au