The pros and cons of paying for LMI

Many borrowers who have heard of lenders mortgage insurance (LMI) regard it as a bad thing. But that’s not necessarily the case.

LMI is an insurance policy designed to protect the lender (not the borrower) in the event the borrower defaults on the loan and the lender isn’t able to recoup all its money by selling the borrower’s property.

Lenders typically make borrowers pay LMI when they buy a property with less than 20% deposit, although exceptions apply. Some lenders expect borrowers to pay the premium up front, although many allow borrowers to add it to their loan.

LMI premiums can be significant – for example, if an owner-occupier first home buyer wanted to purchase an $800,000 home with a 10% deposit (i.e $80,000), their LMI bill could be upwards of $20,000, depending on the lender and state or territory.

Paying out all that money is, clearly, an unappealing prospect, which is why many people try to avoid LMI at all costs. However, when someone considers the bigger picture, they might find there are some circumstances in which the pros of paying LMI outweigh the cons.

The case for LMI

The biggest benefit of taking out a mortgage with a high loan-to-value ratio (LVR) and paying LMI is that it allows borrowers to enter the market  potentially years ahead of schedule.

To continue the hypothetical scenario mentioned above, if the first-home buyer wanted to avoid LMI, they would need to increase their deposit from $80,000 to $160,000 – and saving all that extra money might take years. Our first-home buyer might not want to wait so long to achieve the security and satisfaction that comes from owning your own home.

Delaying home ownership doesn’t just have an emotional cost; it can also have a financial cost. For example, by the time our first-home buyer was able to save a 20% deposit, they might find that property prices had increased by more than the LMI bill they would’ve had to pay had they entered the market years earlier. Also, if property prices had increased, our first-home buyer would now need to save an even larger amount – the hypothetical $160,000 figure mentioned earlier would no longer cover a 20% deposit for the same property.

As a result, there are circumstances in which paying LMI can be a smart move, although it depends on a borrower’s financial position and risk profile.

I can help if you are unsure about LMI

If you want to buy a property and have a relatively small deposit, please come to have a chat.

First, I’ll explain exactly how LMI works. Second, I’ll crunch the numbers for you, so you can make an informed decision about whether it would be in your interests to apply for a high-LVR loan and pay LMI.