Lenders Mortgage Insurance (LMI) is often misconstrued and misunderstood. Without Lenders Mortgage Insurance the dream of property ownership would be beyond the reach for many people.
To define LMI – Lenders Mortgage Insurance is what a lender takes out to mitigate the risk of a decline in the value of the property asset it has mortgaged.
To understand the risk and how the cost of Lenders Mortgage Insurance you need to understand a couple of terms:-
Valuation – The value of the mortgaged property (security for the loan) as determined by a Licenced Valuer
Licenced Valuer – An independent professional who will determine the value of a property. The process involes a comparison of similar properties sold in the last six months.
Loan to Valuation Ratio (LVR) – The amount of the loan divided by the valuation amount expressed as a percentage
If the Loan to Valuation Ratio exceeds eighty percent the Lender will apply mortgage insurance.
In most cases the premium can be added to the loan amount and this is then paid off over the course of the loan. By adding the premium to the loan this then in turn increases your monthly repayments.
The premium charged is risk based, meaning the higher the Loan to Value Ratio the higher the premium.
What are the benefits of Lender Mortgage Insurance? – By paying Lenders Mortgage Insurance it enables you to get into the property market sooner. You don’t need save as much deposit ie. 20% of the property value. You also need to fund costs such as Stamp Duty, Registration Fees and the cost of your Conveyancing.
Lenders Mortgage Insurance can be expensive, but it allows you to get into the property market earlier.
In in an increasing property market the gain in the value of the property will exceed the cost of Lenders Mortgage Insurance in a short time.