When home buyers take out a home loan, they have two options: wait until they have saved a deposit of 20% or sign on a mortgage with less down payment. If you choose the second option, in many cases, you will need to pay lenders mortgage insurance (LMI) before getting a mortgage finance.
What is lenders mortgage insurance (LMI)?
Lenders mortgage insurance protects the mortgage lender against losses they may incur if the borrower can’t repay the loan amount. While LMI only protects the lender, the cost is passed on to borrowers who are not able to meet deposit requirements. Some lenders may waive LMI if a borrower has a 15% deposit or if they belong to a profession that is eligible for an LMI waiver. LMI should not be mistaken with mortgage protection insurance (MPI). Mortgage protection insurance protects the borrower if they can’t repay their home loan for certain reasons such as injury, unemployment, accident or death.
Is LMI tax-deductible?
If the property you are looking to buy is an investment property, then LMI will be tax deductible. Lenders mortgage insurance can be depreciated over the first 5 years after buying the property. As a property investor, you can claim the interest paid on the loan amount to pay your LMI. Now, you know the answer to the question ‘Is LMI tax deductible on investment property?’.
Can LMI be refunded?
The answer is No. Once you have paid LMI, you can’t get a refund for this fee. On the other hand, if you want to refinance your home loan with a new lender, then you may have to pay LMI again if your loan-to-value ratio is above 80%. However, if you want to increase the value of your loan amount and want to stay with the same lender, then you don’t need to pay as much in LMI. Working closely with mortgage brokers at Star Homeloans can ensure that you make the right decision as per your needs.
How much does lenders mortgage insurance cost?
The cost of lenders mortgage insurance can vary depending on the loan amount and the percentage of the value of the property being borrowed. Therefore, it’s worthwhile to include this cost in your overall budget when you plan to buy a home.
How to avoid paying LMI?
Here are some strategies to avoid paying LMI:
- If you have saved at least a 20% deposit of the purchase price, then it can help you avoid paying LMI. This not only minimises your loan amount but also shows the lender that you are a low-risk borrower.
- If you have a guarantor, then their property can be used as a security. This minimises the lender’s risk, making you able to avoid LMI requirements even if you don’t have enough deposit.
- Some government grants are designed to help first-home buyers to boost their deposit. For instance, the first home buyers grant in Melbourne allows first-time home buyers to buy a home with no LMI. The government provides a $10,000 first home owner grant to eligible candidates.
- Certain professions, such as accountants and doctors, may qualify for LMI waivers as they are low-risk borrowers. You can ask mortgage brokers at Star Homeloans if you are looking to secure a home loan.
How does LMI work?
You have to pay LMI to your lender if your loan-to-value ratio (LVR) is higher than 80%. The LMI cost will be based on how much loan amount you are borrowing for buying a home. Usually, the higher the LVR, the more LMI you need to pay.
The lender can repossess and resell the property the home loan is taken against to recover what’s owed to them. In case the property value has decreased, LMI covers the loss incurred by the lender.
Conclusion
If you are not sure whether you are eligible for an LMI waiver or not, you can reach out to Star Homeloans in Australia. We have a team of professional and experienced mortgage brokers who will ensure you get the right home loans with the right interest rates. We have more options as we work with a panel of 60+ lenders in Australia.
