With all of the acronyms in use these days, you might be excused for double-taking on ‘LMI.’ What does it stand for? And why is it even being mentioned when you’re trying to secure your first home loan?
LMI stands for Lenders Mortgage Insurance and it was designed to give people a chance to buy property with less saving, thus hopefully securing the great Australian dream of owning a house for the next generation.
Pretty crazy right? Considering everyone who’s trying to save this magical 20% deposit is happily (obvious sarcasm) already servicing a mortgage — it just happens to be the mortgage of their landlords!
Did we just hit a grey area? Hmm, I think we did, because chances are if you’re looking at LMI as an option, a good savings record might not be your strong point. But how could that be with the amount of rent you’re paying? (Don’t even get me started on tackling saving for a deposit as a single person.)
So let’s get into this what, when, and why of LMI.
The What of LMI
Lenders Mortgage Insurance is a type of insurance that a lender (your bank, broker, or independent lender) takes out to insure themselves against, well, you and the risk of not recovering the outstanding loan balance from you. How unsavoury does that make you feel?
Don’t be offended, everyone is understandably cautious these days. This is just in the event you’re unable to meet your loan repayments and can’t come to another arrangement with your lender, thereby activating a foreclosure (a forced sale of your house). If this occurs and, heaven forbid, the property is sold for less than the outstanding balance of your loan, you’ll find yourself indebted to the bank for that remaining amount. Enter LMI: basically, taking out insurance is a lot easier than filing for bankruptcy. (I refuse to highlight that word. I feel like we’ve already been through enough.)
‘Fine,’ you say, ‘I get that insurance is there to protect me.’ Yes, you’re right, and traditionally insurance is paid for by the party requiring the insurance, but not so in the case of LMI — this is the lenders’ insurance against you defaulting. They, the lender, require it as part of your loan arrangement. But guess what? You get the pleasure of paying for it!
It might sound cruel and unfair that you have to pay for insurance you can’t actually claim against but, as is the case with most major insurances, it’s not about the little payouts, it’s about the worst case scenario. Would you want to T-bone a Tesla without insurance?
Imagine if prices drop suddenly. The world is uncertain at the best of times and if 2020 taught us anything, it’s that things can go south fast. So in conjunction with a sudden downturn in property, perhaps you lose your main source of income. Can you start to see the genuine importance of protecting yourself?
I hate to be all doom and gloom but as stated, this is a ‘written-off Tesla’ situation and yet, you might still be asking why would you fork out money for an insurance that you may not even need...? Is that a tautology? Keep reading.
The When of LMI
This one is pretty simple. You will require LMI to get you across the line and secure your loan when you do not have a 20% deposit saved and can’t cover the shortfall with the help of a guarantor (aka the ‘Bank of Mum & Dad,’ or whatever version familial lending that applies to you).
LMI is paid as a one-off, upfront cost and hey, you get these free steak knives along with it! Nope, sorry, I was thinking of something else.
You’ll pay the fee to the lender at the time of the settlement, the lender then forwards this to the insurer, and voila! This policy is set in stone for the life of the mortgage, regardless of its length.
There is an option to add this fee to your mortgage repayments, but increasing your loan amount to cover that will increase the interest you pay, so it’s advisable to talk to a mortgage broker or financial adviser about the best payment option for you.
It’s definitely worth noting that if you find yourself refinancing down the track, the LMI you paid only covers your initial loan. If you refinance, the new lender will make another assessment of the riskiness of this new loan (shuffles eyes side to side, rubs hands together), so it won’t matter if you’ve already paid the LMI.
Hopefully though, in this scenario, you’ve managed to pay off enough of your loan that the LVR (loan to value ratio) of the new loan is now below 80% so you’ll be in the clear and won’t be charged again. What if the LVR remains above 80% though? You’ll most likely need to pay for LMI twice ... how boring is that?
Alternatively, you could go the other way and try decreasing the LVR by increasing the value of your property, perhaps through renovations and home improvements? A good example of this would be adding off-street parking through a driveway extension or sacrificing some yard space (if you’re lucky enough to have the space to do so in the first place). I suggest rewatching The Castle for further inspiration in the home renos category.
The Why of LMI
If we add up the when and the when, we get the why.
Sadly, you won’t be able to finance your loan with a deposit under 20% without a guarantor unless you take out this type of insurance. It’s our penance for being poor.
Though in all seriousness, it’s not about poverty, or your family situation, or the fact that you only just started saving because you only just worked out that it was something you needed to do. It isn’t even because of the insane property market.
LMI started to have a presence in Australia in the mid ‘60s and was introduced as a way to help more Australians purchase their own home by using a smaller deposit.
It’s a sliding scale and different lenders charge different rates for LMI. It’s an easy thing to find out as most mortgage providers have calculators on their websites that you can use to compare rates when shopping around.
LMI? No Need — Find The Sweet Spot With Sucasa
Some have called LMI a topic so dry that it requires sauce. So let’s see if we can add some.
To recap: LMI has historically allowed people to secure a home loan and buy a property that might otherwise have been out of reach earlier, and without the necessity of a 20% deposit, parental lending, or a guarantor loan, but that approach hasn’t come without a price.
When entering into the housing market, timing is everything.
The beauty of what Sucasa offers the borrower is indeed a sweet spot — that place perfectly in balance between what you’ve saved and what you’re able to pay (service) on a monthly basis.
If you’ve done your research and waited for the right wave, with Sucasa’s help, you’ll be able to get up on the board and catch that wave all the way to shore.
By purchasing a property earlier with a smaller deposit, you’ll potentially gain access to the property’s capital growth sooner. This means that any increase in the property’s value will benefit you, the homeowner, and give you equity in your property quickly. This can then be used for renovations, thereby further increasing your equity.
This is definitely the flip-side of a foreclosure — that idea that somewhere out there, there’s still that goose that lays the golden egg.
What we need to talk about though is savvy investment. Saving for a 20% deposit could take years, during which time property prices are likely to continue to increase, making it even more challenging to save the required 20% amount. Now that you know Sucasa provides an alternative to LMI that allows you to bypass this delay and secure a property sooner, why wouldn’t you just jump in ASAP?!
Being savvy means not being fuelled by fear and rushing into the property market. It’s understandable your brain is telling you that if you don’t do it now, or yesterday, you’ll miss out entirely. But heed this warning: Don’t buy something now just because you can. If you’re saving for your first home, remember it’s going to be your home for the foreseeable future. You’re moving out of the rental market so you won’t be able to just up and move if you’ve made the wrong decision. You’re going to wake up in this place every day and for some of you, grow a family there, so don’t be hasty!
Just know that Sucasa will grant you that wish when you find an opportunity you can’t pass up, that is where you actually want to live, and while you are still short of your 20%. (Yes I know they’re slightly different ’w’ words but you get my drift.)
Everything in life is, or should be, about informed decision making. Good luck!