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For many first-time homebuyers and property investors, taking the leap into property ownership comes with its fair share of financial stress, not least of which is the daunting prospect of Lender’s Mortgage Insurance (LMI).
Traditionally, LMI is a one-off charge that can significantly impact your home loan and financial planning. But what if you had the option to pay your LMI monthly?
This concept could potentially ease mortgage stress and make property investment more accessible than ever before.
What is LMI?
LMI is a type of insurance that protects lenders when borrowers are unable to repay their home loans. It is typically required when a borrower has a deposit of less than 20% of the property’s value.
While it offers security to lenders, it can be a significant upfront cost for borrowers, often added to the loan amount and repaid over the life of the loan with interest.
How Does it Usually Work?
Most often, LMI is paid as a lump sum at the start of the loan. The cost depends on several factors, including the size of the loan and the percentage of the home’s value being borrowed.
This upfront cost can be quite substantial, adding to the financial burden on first-time homebuyers who are already struggling to meet the hefty, upfront deposit requirements in today’s property market.
Paying LMI Monthly
Imagine a world where instead of paying a large sum upfront, you could spread your LMI payments over monthly instalments. Some innovative home loan specialists are now offering this option, recognising the potential benefits for borrowers.
How Would Monthly LMI Payments Work?
Monthly LMI payments would allow borrowers to pay a smaller, more manageable amount each month rather than a significant one-time payment at the outset of a loan.
Advantages of Monthly LMI Payments
- Reduced Initial Financial Stress: By breaking down the LMI into monthly payments, borrowers can reduce the upfront financial burden, freeing up cash for other buying costs or savings.
- Improved Cash Flow Management: Regular, predictable payments can help with budgeting and cash flow management, particularly important for first-time homebuyers and property investors who may have limited savings.
- Increased Accessibility to Home Ownership: This option may make property ownership more attainable, allowing more people to enter the housing market without the barrier of a hefty LMI payment.
- Flexibility and Control: Borrowers have more control over their finances and can potentially pay off their LMI faster if their financial situation improves.
Case Study:
Jo, a first-time homebuyer, is looking to purchase a $600,000 property but only has a 10% deposit ($60,000). Typically a lender would require a 20% deposit to secure a loan, however by taking out LMI, Jo’s lender is prepared to finance Jo’s purchase with an LVR up to 90%.
The total LMI cost is estimated to be $12,000 if paid upfront. However, Jo has already allocated the entirety of her savings to the $60,000 deposit.
She is unable to pay the LMI amount in a lump sum as it would reduce her deposit, thereby reducing her borrowing capacity.
By choosing to pay LMI monthly instead, Jo spreads the cost over the life of the loan, adding a small amount to their regular mortgage payments.
While paying LMI monthly means they’ll pay interest on the insurance amount, the added cash flow flexibility is more beneficial to Jo as a first-time buyer with limited savings. As a result, Jo is able to secure their home sooner without the burden of a large upfront payment.
Would monthly LMI get you in the game?
The idea of paying LMI monthly offers an innovative avenue into property ownership for many prospective first homebuyers. It addresses one of the significant financial hurdles of home ownership by offering a more flexible and manageable payment structure.
Yes there are certain risks, as with any financial decision:
- Monthly LMI can help overcome a deposit hurdle but can add to servicing costs of the loan on an on-going basis, so it may not be suited to all.
- Monthly LMI does not necessarily need to be paid over the entire duration of the loan. Generally, it will be more suitable the more aggressive someone pays their loan down, as that will generally mean the policy can be cancelled earlier.
For example, Resi offers a monthly LMI solution to borrowers, which can be cancelled once the LVR hits a certain threshold. This can be achieved by way of additional repayments, increase in the value of the property or a combination of both.
These financial tools can have a steep learning curve, so if you want to develop your understanding or simply find out if you’re eligible, reach out to one of our experienced mortgage brokers near you.
