Search

Investors Use of Lenders' Mortgage Insurance


Lenders' Mortgage Insurance (LMI) is typically seen as an additional cost when people buy a property. Some experts, however, think that investors can make LMI work for them. LMI is critical for the lender as it protects them if you're no longer able to pay your mortgage. But, how can LMI work in your favour as an investor? In this article, our guest topic contributor, Michelle Lauf of JLH Finance has provided us with great LMI explanations, while OPQ is taking a look at how LMI comes into play for investors.

Firstly – What is LMI?


Michelle has an extensive career within the finance sector, whilst having positions within some major financial institutions, Michelle has moved into the independent financial sector as a Mortgage Broker for her clients in Brisbane, providing individual services & products throughout Brisbane & QLD.


Below, Michelle has contributed a wealth of knowledge in a snapshot relating to LMI.


“Lender’s mortgage insurance (LMI) is required when the value of the loan is more than 80% of a property’s purchase price or property value.

A lender considers a loan higher risk if the loan-to-value ratio is greater than 80%.

The amount paid in lenders mortgage insurance depends generally of two key things:

1. The loan amounts

2. The loan-to-value ratio (loan amount divided by the property value)

The higher the loan amount and loan-to-value ratio, the higher the lenders' mortgage insurance will be.

Lenders mortgage insurance can be paid upfront, or it can be capitalised onto the loan.


When it is capitalised onto the loan it means that if your loan was $500,000 and your LMI was $10,000, your new loan amount would be $510,000. It is important to keep in mind that most lenders when capitalising your LMI, the new borrowing amount (i.e. $510,000) cannot exceed 95% of the property value.


I wouldn’t normally recommend LMI to a client, however, there are circumstances where if you’re struggling to save up a deposit, it can save you money in the long-term.”


Secondly - How is LMI calculated?


As Michelle continues to explain below, LMI is calculated in different ways, depending on the insurer. Your premiums will vary based on your loan amount, deposit amount, loan type and your employment status. Some property investment websites have LMI estimators, which can help you weigh up different options. Your mortgage broker may also be able to assist.


If your loan-to-value ratio is higher than 80 per cent of a property's value, your monthly repayments will be higher than someone who paid a larger deposit, and you may be at higher risk of defaulting on your loan.


This is the key reason why lenders require LMI — to ensure they are protected by the increased risk exposure of properties with high LVRs


From the below, you can see that by the client taking out LMI, they are saving themselves approximately $300 per month on their rent.”

Property value

$500,000

Loan amount (90%)

$450,000

Lenders mortgage insurance*

$5,000

New loan amount

$455,000

Monthly loan repayment (@ 3%)

$2,000

Rent per month

$2,300

Savings

$300


*the above example is based on estimates only and figures have been rounded for simplicity

“If you work in a high-demand and well-paying industry, you shouldn't have too much difficulty finding an LMI provider. Some LMI providers consider professions such as doctors, dentists and lawyers to be low risk and may waive the LMI on a loan.”




Viewing LMI as an investment


While LMI is a lender's safety net for people who borrow more than 80 per cent of a property's value, some property investment experts, such as Mario Borg, Mortgage Broker and Director at Strategic Finance, believe investors should see LMI as an "investment rather than a cost".

For investors, LMI can help you buy a property when your deposit is lower than 20% of the property's value. This can help you to buy a property quickly instead of waiting to save up a deposit and missing out or being priced out later down the track. In these cases, it's helpful to calculate and analyse the cost of capital growth and LMI versus staying out of the market to keep saving a deposit and missing out, which can cost more than the LMI premium.

A good way to grow your portfolio


If you're an investor looking to grow your portfolio, LMI can help you secure your next property without using too much equity from your current property. This can help you add more properties to your portfolio faster and with a smaller deposit.




Michelle Lauf is an Executive Partner of JLH Finance, providing personable service and tailored packages to suit her clients’ needs through her reach of lenders with extensive financial products.

JLH FINANCE

07 3857 4613

admin@jlhfinance.com.au




Remember, this article does not constitute financial or legal advice. Please consult your professional financial and legal advisors before making any decisions for yourself.

34 views