4 lenders’ mortgage insurance myths exposed
Buying a home is a big milestone.
Lenders’ mortgage insurance (LMI) could help borrowers with less than 20% deposit buy a home.
Eligible first home buyers can also purchase a property sooner, with the introduction of the Australian Government 5% Deposit Scheme.
There are many myths around LMI, so before you apply for a home loan, we’re here to bust some of those myths.
Myth 1: LMI only benefits the lender
If you’re shopping around for a home loan, paying for insurance that protects the lender – and not you – might seem like a waste of money.
But it can benefit home buyers too, as LMI allows lenders to offer home loans to borrowers who haven’t saved the full 20% deposit.
LMI can help you get onto the property ladder sooner
Without the protection of LMI, lenders would be likely to reject home loan applications where the borrower does not have a 20% deposit.
The cost of LMI can usually be incorporated into the loan itself, so there’s often no upfront cost to borrowers.
“By covering the lender’s risk, LMI allows more people to get a home loan that may otherwise be unachievable,” said Chris Butel, General Manager, LMI at QBE Insurance.
Myth 2: It’s harder to get a loan approved with LMI
Some borrowers are nervous about applying for a loan if they know they’ll need LMI. After all, isn’t a lender is more likely to turn them down if they appear to be a greater risk?
Not necessarily.
LMI may minimise a risk to the lender. That’s why it may improve the chance of an application being approved, as the lender has an added layer of protection.
That said, you’ll still need to show you are a suitable applicant with a good credit rating, regular savings, and the ability to pay the loan.
Related article: Understanding LMI
Myth 3: All mortgages are the same
Buying your first home can be complicated. Banks and loans are often full of jargon which can be confusing for the borrower.
That means some first home buyers might assume mortgages – and LMI – are all created equal.
But that’s not the case.
Like all products from banks and other providers, each will have its own LMI product with associated benefits. Online calculators and comparison sites could help you narrow down your options.
How much is LMI?
While many things affect the cost of LMI, the key factors are the size of the mortgage and deposit. The more you’re borrowing and the less you have saved, the greater a risk you may appear to be to a lender.
Myth 4: I can’t pay LMI again for future loans
LMI isn’t just for first home buyers.
If you refinance or take out a mortgage again in the future, you may need to pay LMI if you don’t have 20% of the home’s value in equity or savings.
Some lenders might ask for LMI to be included as part of the refinancing process. But they might waive part of the premium if you already have a loan with them.
Put simply, there are pros and cons to applying for a home loan with LMI and everyone’s circumstances are different. It’s worth weighing up the benefit of having a home loan without the added expense of LMI, versus getting into the property market sooner.