It doesn’t matter which way you look at it, buying a home is an expensive exercise. Thankfully, the benefits can outweigh the negatives – you gain security, the satisfaction of designing your home exactly to your taste, and you stop wasting money on rent.
Of course, when you are in the process of making the most expensive purchase of your life, your mind is most likely to focus on the vast sums of money you must hand over. From legal fees to government charges and home loan fees, the bills appear endless.
What many first-home buyers may not realise is that there is an easy way to minimise the initial costs associated with buying a home. And that’s by eliminating or minimising lenders mortgage insurance.
Also known by the catchy acronym of LMI, lenders mortgage insurance is a one-off fee paid at the time of settlement to your bank. It’s designed to protect the bank – or lender – from the risk of being left out of pocket if you ever run into financial trouble and are unable to pay off your mortgage.
If you cannot meet your repayments and your house has to be sold, LMI covers the bank for any shortfall should the property sell for less than the outstanding mortgage. It does not offer any protection to you, as the borrower, so if you are concerned about protecting yourself from losing your home you will need income and mortgage protection insurance.
The LMI fee is calculated as a percentage of the amount you borrow, but it is also subject to a tiered system depending on your overall loan amount. So, the more you borrow, the more you will have to fork out to ensure the bank’s peace of mind.
The good news is that the higher your deposit, the lower the LMI fee you’ll have to pay. But better yet, if you save more than 20 percent of the purchase price of your home, you may not have to pay lenders mortgage insurance at all, but this will depend on your lender. As a guide, the LMI premium charged to buy a $400,000 property, and with a 10 percent deposit, is around $7000, according to Genworth’s LMI calculator.
While LMI exists to protect the lender, the advantage to home buyers is that it enables you to enter the property market sooner, with a smaller deposit. With a little patience and a bigger deposit, however, you can keep LMI at bay.