When buying a home, most people will need to take out a mortgage to finance the purchase. If you don’t have a large enough deposit, your lender may require you to take out Lenders Mortgage Insurance (LMI). But what is LMI, how much does it cost, and how can you calculate it?
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is a type of insurance that protects the lender in the event that the borrower is unable to repay their mortgage. It is typically required when the borrower has a deposit of less than 20% of the purchase price of the property. This is because borrowers with a smaller deposit are considered to be at a higher risk of defaulting on their mortgage.
LMI is a one-off cost that is paid by the borrower at the time of settlement. It does not provide any protection for the borrower, only the lender. If the borrower defaults on their mortgage, the lender can make a claim on the LMI policy to recoup any losses.
How much does LMI cost?
The cost of LMI can vary depending on a number of factors, including the size of the deposit, the value of the property, and the lender’s requirements. In general, the smaller the deposit, the higher the cost of LMI. LMI can cost anywhere from a few thousand dollars to tens of thousands of dollars.
To give you an idea of how much LMI might cost, let’s look at an example. Suppose you are buying a $500,000 property and have a deposit of $40,000 (8% of the purchase price). Your lender requires you to take out LMI, which is calculated as a percentage of the loan amount. The cost of LMI for this scenario might be around $8,000.
How to calculate LMI
To calculate LMI, you’ll need to know the purchase price of the property, the size of your deposit, and the lender’s requirements. LMI is usually calculated as a percentage of the loan amount, which is the amount you need to borrow from the lender.
To calculate LMI, you can use an online LMI calculator or speak to your lender or a mortgage broker. They will be able to provide you with a quote based on your specific circumstances.
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In conclusion, Lenders Mortgage Insurance can add a significant cost to your home purchase, but it may be necessary if you have a smaller deposit. It’s important to understand how LMI works and how much it might cost so that you can factor it into your budget when buying a home. Always speak to your lender or a mortgage broker for advice on your specific circumstances.