LMI – Yes or No?

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LMI, yes or no?

Lenders mortgage insurance is the most debated concept when it comes to buying your first property, which stands for LMI, lenders mortgage insurance. Now when considering it you might say, “Well do I save a bigger deposit or do I go with now, ‘cos I wanna catch the ride on the market?” It’s a pretty important question to consider. Now if you are looking to get in early, what are the pros and cons?

Number one is leverage. The pro of that is, you’re buying a property with less of your own money and more of the banks. That allows you to have a bigger return on investment should the market take off, because you’ve bought that same asset, but with this much money instead of more. That’s a big pro.

The other pro is timing. You can get in today or maybe tomorrow, but if you’re asked to save double the deposit to avoid lenders mortgage insurance, suddenly you might a 60K deposit for a $500,000 property or a $400,000 property and that might turn into now needing $120,000 or 100,000 plus for the same property to avoid it.

Savings is not easy and it does take a lot of time, so imagine how much time in the market you miss out just because you didn’t get in there with lenders mortgage insurance. But then comes the cons. If you’re considering the cons, what are the cons around LMI? Number one is, pay for something to get early access. It’s almost like, A, you’re getting this VIP membership to this club, well it’s the same you’re getting early access to this property, so we’re gonna charge you this little bit extra.

Why is this charge happening? The banks actually want to be covered in the case that … Values change, you default or can’t make payments and you have to get rid of the property at a loss. Because of the risk, that becomes higher, considering you’re borrowing more for something there’s less gap in the values, the bank says, “Hey insurer, how much is it gonna charge for us to give this person the property at this price?” Let’s just say a $500,000 property, it might be 6 to 8K for lenders mortgage insurance. 

The bank will then get that money and say, “Hey Mr or Mrs customer, can you please pay this charge now, because we’re giving you this loan early?” That loan will incorporate lenders mortgage insurance in it. That just simply means that you’re now gonna have an extra payment or an extra cost when buying the property. But if you did have a six to eight thousand or even 10,000 dollar lenders mortgage insurance, that little bit of growth in the property could technically outweigh it. Now if you’re talking a $500,000 property, 10% growth, or could be a couple of years that it takes to get to that, that’s $50,000. Does that 10,000 really mean that much then?

But at the same time you don’t wanna be over-levering yourself because a small shock could put you out of balance. What do the small shocks look like? If you’ve got a higher loan amount compared to the property value, if property values change, you could feel uncomfortable with your wealth position. And secondly, if interest rates rise, you lose a job, or if expenses come up that were unexpected, suddenly if you don’t have the right buffers, because you’ve got a more costlier loan in place due to the higher loan amount, suddenly you’ve gotta be in a good position with your finances.

So the key is to understand, it is a tool in your favor to get you access to property sooner, to grow a portfolio sooner and for you to have a greater ROI, return on investment in case the property values grow. But on the flip side, it’s important and you might need to save a little bit extra for that cost, you will have a cost at the second part and lastly, there is higher risk because of a higher loan to the value.

Hope that helps you understand more about LMI, lenders mortgage insurance. 

That’s it from us here at InvestorKit, the experts in wealth creation, helping you take action.