First home buyers will have much to contend with during the mortgage process.
One concept they will likely have to master is that of lenders mortgage insurance (LMI).
What is LMI?
In short, LMI is a safety net for mortgage lenders.
Whenever a financial institution loans money, they are making themselves vulnerable to a default on the part of the borrower.
In order to reduce this danger, lenders analyse a borrower’s financial profile to ensure they are responsible and trustworthy.
They also ask for a deposit to be put toward the purchase of a property.The standard deposit is generally 20 per cent.
However, in cases where borrowers are not able to put down a deposit of this amount, they can instead pay for an LMI policy.
LMI exists between a lender and an insurer, with the borrower paying for it.
Essentially, it is coverage intended to reduce the financial burden that may occur if a mortgage borrower is unable to repay their loan.
LMI is not always necessary when buying a home. It is typically only required when a borrowers has a loan-to-value ratio (LVR) higher than 80 per cent.
However, this is ultimately up to the lender, and can apply to LVRs of lesser amounts depending on the type of loan.
Ways to avoid LMI
While LMI can make it possible for borrowers to take out a home loan with a smaller deposit, it’s also an added cost that many first home buyers may not have planned on.
However, there are ways around paying for LMI.
If saving 20 per cent or more as a deposit is not an option, borrowers may be able to get a guarantor loan.
With this type of loan, a guarantor, typically a family member, promises to be responsible for a portion of the loan amount.
Otherwise, saving up for a minimum deposit of 20 per cent or more is the best strategy.