Lenders Mortgage Insurance (LMI) is generally required if you are borrowing 80% or more of the purchase price of a property. LMI can be a short cut to getting into the market but can be a nasty trap for the inexperienced. For the investor anxious to secure a property, who has found themselves with less than 20% deposit, it can seem an attractive option, but what exactly is it?
What is LMI?
LMI is an insurance policy that protects the bank from losses. Should you need to sell the property and not be able to re-coup the borrowed funds from the sale, the bank will call in the policy to avoid a loss.
How much is it?
LMI will vary depending on the amount of shortfall. On a $600,000 property with a 10% deposit LMI could be as high as $15,000, payable upfront. This is a large sum of cash to come out of your savings. On occasion the bank may lend the LMI to you, but of course you will be paying interest on this amount and that will impact your cashflow.
Why would you do it?
If the market is rising at 5% p/a, a $600,000 property will increase at $30,000 p/a. If you can’t save $90,000 to make up for the additional 10% deposit + the annual growth, then the LMI fee to get in the market may be worth it, but should the market turn, you may find yourself owing more than the property is worth. Speaking with a financial planner is important before making these big decisions.
What’s the alternative?
The most common alternative is for a parent to contribute the additional 10% and additionally provide a parental guarantee, whilst receiving payment via a loan agreement. The bank would expect this to be a formal agreement otherwise it will be considered a gift.
Our team at Launch Money are available to discuss your borrowing capacity, provide some security around a pre-approval and help to get you started on your property journey.