Do You Have to Pay LMI Upfront?
Lenders mortgage insurance (LMI) is a type of insurance that lenders require borrowers to purchase if they have a loan-to-value ratio (LVR) of more than 80%. LMI protects the lender in the event that the borrower defaults on their loan.
There are two ways to pay LMI: upfront or by capitalisation.
This guide will explore whether you have to pay LMI upfront or not. We will also provide strategies on how to avoid LMI where possible.
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Upfront LMI
Upfront LMI is paid as a lump sum when the loan is taken out. This is the most common way to pay LMI.
Capitalised LMI
Capitalised LMI is added to the loan amount and is paid off over the life of the loan. This can be a good option for borrowers who do not have the money to pay LMI upfront.
Upfront LMI vs Capitalised LMI
Here are the key points of difference between upfront LMI and capitalized LMI:
Upfront LMI
- Advantage: Lower overall cost as no interest is accrued on the LMI.
- Disadvantage: Requires a larger initial outlay, which can be a strain on your budget.
- Impact on Monthly Payments: Lower monthly mortgage payments, as LMI is not included in the principal.
- Overall Cost: Less expensive in the long run as there is no interest on the LMI.
Capitalized LMI
- Advantage: Easier on your immediate budget as the cost is spread over a longer period.
- Disadvantage: Increases the total loan amount, leading to higher interest payments over time.
- Impact on Monthly Payments: Slightly higher monthly mortgage payments as LMI is included in the principal.
- Overall Cost: More expensive due to the interest accrued on the capitalized LMI.
How to avoid LMI
Now, let’s delve into the exciting part: strategies on how to avoid LMI. This can be a game-changer, potentially saving you thousands of dollars. Here are few ways you can do that:
A bigger deposit
The simplest method to avoid LMI is to save a larger deposit. Generally, if you have a deposit of 20% or more of the property’s value, you can skip the LMI.
Family guarantees
A family guarantee allows your parents or a close family member to use their property as collateral to cover part of your loan. This can help you bypass the LMI.
Professional packages
Certain professionals, such as doctors or lawyers, may qualify for LMI waivers due to their profession’s perceived low risk.
Government schemes
The Australian government offers several schemes like the First Home Loan Deposit Scheme, helping first-time buyers avoid LMI.
How much does LMI cost?
The cost of LMI varies depending on the lender, the amount of the loan, and the LVR. Generally speaking, the higher the LVR, the higher the cost of LMI.
The exact cost of LMI can only be determined by obtaining a quote from a lender or an LMI provider. Different lenders and insurers may have different rates and criteria for calculating the premium.
Do you have to pay LMI upfront?
No, you do not have to pay LMI upfront. You can either pay it upfront as a lump sum, or you can have it added to your home loan and pay it off over time.
If you choose to have it added to your home loan, the amount of LMI will be added to your loan balance and you will pay interest on it just like you would any other part of your loan.
Pros and cons of paying LMI upfront
There are a few things to consider when deciding whether to pay LMI upfront or to have it added to your home loan.
If you have the money to pay it upfront, it may be worth doing so, as you will save on interest. However, if you do not have the money to pay it upfront, having it added to your home loan may be the best option for you.
Pros:
- You will save on interest.
- You will have a lower monthly mortgage payment.
- You will have more equity in your home sooner.
Cons:
- You will need to come up with a large sum of money upfront.
- You may not be able to afford to pay it upfront.
Wrapping up
LMI can be a costly expense, but there are ways to avoid it. If you are planning to buy a property in Australia with a low deposit, be sure to do your research and compare lenders to find the best deal.
It’s recommended to contact lenders or mortgage brokers to get specific information and quotes regarding LMI costs based on your personal circumstances.
Contact Odin Mortgage today and make your property dreams a reality without the burden of LMI expenses.
Get a free Australian mortgage assessment today.
Frequently asked questions
Yes, LMI is typically paid upfront when the loan is taken out. However, some lenders offer the option to capitalise LMI, which means that it is added to the loan amount and paid off over the life of the loan.
Yes, you can pay PMI upfront. This is typically the most expensive way to pay PMI, but it can be a good option if you do not want to add PMI to your monthly mortgage payment.
The main downside of LMI is that it is an additional cost that you will have to pay when you buy a property. LMI can add thousands of dollars to the cost of your home, so it is important to factor this into your budget when you are planning to buy a property.
The amount of deposit you need to avoid LMI varies depending on the lender and the type of loan you are applying for. Generally speaking, you will need a 20% deposit to avoid LMI. However, there are some lenders that offer LMI-free loans for borrowers with a lower deposit.
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