LMI stands for Lender’s Mortgage Insurance and is an insurance which is paid by the purchaser to insure the lender because a loan amount over 80% of the value of the house is deemed to be a higher risk.
Opinions on whether buyers should pay LMI are divided but it’s always worth going through the process of a full assessment before you decide whether it’s worth it.
As an example, let’s say you are purchasing a $600,000 home (including stamp duty, application fees and conveyancing costs) and you only have a 10% deposit, $60,000, a great effort!
You’ve been saving $750 for the last year and a half to achieve this. You apply for a loan of $540,000 and your LVR (see my other blog if you’re unsure about this) is 90%.
Your LMI component on a 90% LVR will be approx $12,100 which will be added to the total loan amount so that you can get you into your home today.
On the other hand let’s say you decided to wait another year and a half to save the other 10% so that you did not have to pay LMI.
Home values have gone up conservatively by 3% each year (just as an example)so that homes worth $600,000 have increased by approx $27,000 in that year and a half.
Sometimes it’s better to pay LMI, even in a conservative market. It may save you thousands in the long run.