Lenders Mortgage Insurance on an investment property is also known as LMI. And I have a bad habit when I talk to clients and I say LMI, and they look at me with a glazed face, “What are you talking about?” We’re talking about Lenders Mortgage Insurance.
What is Lenders Mortgage Insurance? It’s a cost to borrowing money. That’s all it is. People are terrified by it because people don’t like paying the fees. However, I don’t mind it. I’ve actually bought investment properties before and I’ve paid Lenders Mortgage Insurance. Why? Because I look at it as a [fade 00:00:31] to hold more of my own money. If I don’t want to pay Lenders Mortgage Insurance, I need to borrow 80% and no more. I need to have a 20% deposit, which means I could have a 90% lend and only made 10% deposit, but that I have to contribute more money to do the 80%. So having mortgage insurance, allows me more flexibility to make future decisions and investment opportunities, will become available to me.
So it’s generally around 3% of the transaction or if we go below 90%, say 85 or 83% as a loan to value ratio, well then the mortgage insurance will decrease a quarter leaving as well. Might it be 1% or one and a half percent of the transaction.
You don’t have to physically pay it out of your own pocket, it can get being added to the line, now some banks are different. Some banks, you can do 90% plus mortgage insurance, other banks are 90% including mortgage insurance. And that fee is charged on settlement. You don’t have to come up with the money beforehand, it’s just charged on settlement.
From a tax perspective, we can claim it in our tax. So if you have a mortgage insurance cost of $5,000 and you’re in a 34% tax bracket, well, you’re going to get about $1,650 back. So really the mortgage insurance is only costing you under $3,500 to hold an extra 10% cash, in either equity or cash to be used for a future investment decision.
Do you pay LMI on Investment Properties?
If you’re applying for a mortgage, it’s likely that you’ll need to be mindful of two important terms: Loan-to-Value Ratio (LVR) and Lender’s Mortgage Insurance (LMI).
Your LVR and the LMI premium are two things that go hand in hand. In fact, they each have the potential to affect what fees you get charged when applying for a home loan. In some instances, your LVR can even determine what interest rate you’ll be charged by your bank.
Here is a quick explanation of each of the terms and how they could affect you:
Loan-to-Value Ratio (LVR)
Your Loan-to-Value Ratio, or LVR, is calculated on the loan amount you’re applying for and the valuation of the property you’re using as collateral security. So if you’re looking to buy an owner occupied home to live in, the amount of deposit you intend to put towards the purchase will determine your LVR.
For example, if you want to buy a home valued at $400,000 and you have a $20,000 deposit, then you’ll need to borrow $380,000. If you divide your loan amount by the value of the property and multiply the result by 100, you’ll see that your LVR will be 95%. If your deposit amount is $40,000 on the same purchase price, then you’ll borrow $360,000 and your LVR will be 90%.
Most Lenders will allow you to borrow up to 95% for an owner occupied property and up to 90% for an investment property. If you are purchasing an investment property, it’s possible you might have access to equity in your own home to lower the LVR for your purchase.
However, keep in mind that if you borrow more than 80% of the property value, you’ll need to pay a Lender’s Mortgage Insurance premium.
There are some lenders who will give discounted interest rates for loans under 80% LVR. So not only will you save on interest by having a larger deposit or more available equity to use, but you also won’t be charged an LMI premium. Always look at the fine print as some Credit Unions will only give a discounted interest rate for LVR’s of 70% or less.
Lender’s Mortgage Insurance (LMI)
It’s common for many borrowers to assume that the Lender’s Mortgage Insurance (LMI) premium provides them with some type of insurance coverage on their loan.
In reality, the LMI premium you pay actually protects the lender – not you.
If your mortgage application shows a loan amount that takes your LVR over 80%, your application will be assessed by the lender’s credit assessment team as well as the Mortgage Insurer’s assessment team.
While the bank may view your mortgage application favourably, there’s a chance the mortgage insurer’s assessors might not. If this happens, the mortgage insurer can reject your application.
Calculating the amount you’ll pay on your LMI premium can be tricky, as it can vary depending on the lender and which mortgage insurance company they use. The premiums are also calculated on a sliding scale, so if you have a higher LVR you’ll pay a larger LMI premium.
Mortgage brokers strive to ensure you use the best loan structure for your individual financial situation so you can potentially avoid, or at least minimise, the amount of LMI you pay.
In order to avoid paying an LMI premium, you’ll need to keep your LVR below 80%. If you don’t have sufficient equity or you don’t have a large enough deposit, ask your mortgage broker if there are any ways you might minimise the amount you pay on your LMI premium.