April 9, 2011
The most important thing to realise about lender’s mortgage insurance (LMI) is that it insures your lender, not you. If you default on the loan repayments and your home is sold for less than your loan amount, the insurance will compensate your home loan organisation. This does not absolve you from the debt as the insurer can then pursue you for the money.
LMI can be very costly, varies greatly and is usually calculated on a sliding scale. That is, the greater the percentage of the property value you borrow, the higher the mortgage insurance premium payable.
It’s usually only required if you are borrowing more than 80 percent of the value of your home, so if you want to borrow up to 100 percent of the value, your mortgage insurance is likely to be expensive.
In some cases it is possible to borrow up to 85 percent without the lender asking you to pay mortgage insurance but these loans my come at a higher interest rate so you may not be better off in the long run.
Even a small deposit versus no deposit can make a big difference. For example, on a $400,000 home loan, a deposit of just $20,000 (5 percent) could make your mortgage insurance around $4000 cheaper.
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