Buying Your First House? Why You Need to Beware LMI
I hate lenders mortgage insurance.
Or LMI, which lenders like to call it.
I think they do this to make it sound more acceptable, kind of like KFC; it’s not fried chicken, it’s KFC!
I think the entire concept is a scam and, for some reason, the banks have suckered everyone into believing it’s a way of life—an accepted fact.
Well, let me tell you. If you can avoid it, avoid it like you might try and avoid a heart attack.
But let me tell you why.
What is LMI?
The premise goes like this: you don’t have enough money for an initial deposit of 20% of the loan. That’s ok, says the bank, they have loans that are up to 95% of the value of your home purchase. All you do is put down 5% in cash, and the remaining 95% is stumped up by the bank.
Sounds great, right?
Oh, except for one little thing.
Because the bank is taking a risk by lending you more than 80% of the house purchase price, the bank wants to be insured for taking on that ‘extra risk’.
LMI means YOU pay for the insurance FOR the bank.
That’s right. Read that again, but more slowly—you pay for the bank’s insurance.
Because you know…banks are hard up for money.
The big four banks reported a combined cash profit after tax from continuing operations of $26.9 billion, in 2019.
Times sure are tough for the banks.
Let’s run the numbers.
If you buy a $500,000 home with a 5% deposit, you’ll pay LMI of around $15,000.
Because you don’t have $15k laying around, and most often can’t afford the monthly premium of paying for the insurance, the bank will ‘capitalise’ the LMI onto your entire loan.
In the end, LMI will likely cost you closer to $30,000 by the time you’ve paid off your mortgage. Why wouldn’t you want to avoid it?
So what happens when you end up no being able to pay for the loan; for whatever reason, maybe something like a virus resulted in a government-mandated shutdown that placed you out of work?
The bank kicks you out of your home.
Your bank, in theory, will recover any shortfall on the loan from the insurance—the LMI. Remember, LMI is meant to act as protection.
But even if they do, it doesn’t mean you’re off the hook.
The insurance company providing the LMI may (and often do) seek to recover the shortfall amount from you anyway.
You see, the insurance is NOT for you. You paid for it, but it’s not for you—it’s for the bank.
How can you avoid paying LMI?
I get it. Sometimes you just don’t have the money, and you really, really want that house. It’s your dream house, the one you’ve been waiting for.
- The fact that there is LMI might indicate that the property you are thinking about buying really is too expensive. You can’t always get what you want.
- Consider a guarantor loan.
- Think of ways to source more money.
But remember, if you can’t stump up 20% of the deposit, the banks are going to make you pay.
- Don’t buy a house you can’t afford. If you can’t come up with 20% of the money (plus closing costs), don’t buy it.
- Avoid LMI at all costs. Borrow from family? Free up cash from somewhere? LMI is easy to get because the banks and insurance providers make money from it.
- If you can’t avoid it, don’t capitalise it.
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This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.
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