What is Lenders Mortgage Insurance?
Saving a 20% deposit can often make that dream home seem very far in the future however Lenders’ Mortgage Insurance may be the answer to reducing the amount of deposit you need to save. It does come with added costs and risks though, so it pays to be informed. This jargon buster video helps to explain how it works, what the additional costs and risks are, so that you can make a more confident decision about whether it’s the right tool to help you buy your new home.
What do you do when you’ve found your dream home but can’t quite find that 20% deposit? Lenders Mortgage Insurance is one way to help you get there. Lenders Mortgage Insurance may help you, as a prospective home buyer, get into the property market sooner with a smaller deposit, or enable you to purchase a higher value property than you might otherwise be able to afford.
Lenders Mortgage Insurance enables a lender to lend more against the value of your property than normal, reducing the amount of deposit you need to provide. The insurance covers the lender if you’re unable to repay the loan. Remember though, this means that you’re borrowing more which could cost you more in the long run.
Your loan repayments will be higher as more interest will accrue for the increased loan amount and you’ll need to prove to the lender that you have sufficient income to cover the higher repayment amount, especially if interest rates go up. You’ll also need to pay the one-off upfront premium which can be a significant cost.
You should also consider whether you’re comfortable with the additional risk to your financial situation. If something should go wrong and you need to sell the house quickly, you may not achieve the price you need to completely repay your home loan.
As an example, let’s say you want to buy a property worth $500,000. Using the bank’s usual lending value of 80%, this means you would need to come up with a $100,000 deposit, plus enough to cover any other upfront costs like stamp duty. However, by using Lenders Mortgage Insurance you may be able to borrow up to 95% of the property value meaning that you only need a $25,000 deposit.
Of course, this means you would have a loan of $475,000 against a home worth $500,000. A riskier proposition for you and the lender. In most instances, the more deposit you can save the better. While it may be a tempting solution to owning your dream home sooner, Lenders Mortgage Insurance increases your risk and costs so needs to be very carefully considered.
Remember, you pay for the insurance, but it protects your lender, not you. Curious to know more about finances? Have a look at the range of other Davidson Institute financial education resources.