There is no denying it - mortgage insurance or lenders mortgage insurance (LMI) kind of sucks.
This short article is about ways in which you can avoid mortgage insurance or at very least significantly reduce costs but first a few basic facts:
- It protects the bank not you
- It is a once off premium
- You have to pay it if your loan amount is greater than 80% of the property's value
- The premium can often be added to the loan meaning you do not need to increase your cash deposit
- Getting a refund if your refinance these days is all but unheard of
- It can be expensive but you knew that right!
In the long term its often not as expensive as you may first think - especially if you have a strategy of paying off the loan sooner than the approved loan term (which everyone should try and aim for!). Paying one or two percent extra to buy a property sooner with a smaller deposit can often be recouped by paying today's prices rather than delaying your purchase by a year or more and paying tomorrows prices which could be much more than the cost of the initial premium.
So how do you avoid or at least minimise paying lenders mortgage insurance?
Option One - Reduce your loan to valuation ratio
For almost all circumstances mortgage insurance kicks in once you borrow in excess of 80% of the value of your property. By increasing your deposit or reducing your purchase price you may be able to minimise the cost of the premium. A sure fire way to save money is to keep your lending under 90% of the value of the property - the moment you go above this threshold the cost of the mortgage insurance sky rockets (it can almost double in many instances). Call us to get a quote or tailored explanation of how it might apply based on your scenario.
Option Two - Use A Family Pledge
Your can eliminate the mortgage insurance cost entirely with the help from a family member who already owns property. This increasingly popular facility that we use is known as limited equity guarantee or a family pledge structure. Check out a detailed explanation of how this simple structure works here on our blog.
Option Three - Do you work in one of these industries?
Some of the banks offer packages that enable certain borrowers to lend up to 90% without paying any mortgage insurance. This is generally available for professionals in speciality industries such as lawyers, doctors, physios, dentists, sports stars and entertainers.
I hope this helps explain how mortgage insurance works in a little more detail. Please contact us here for an obligation free chat or ring 03 9939 7576 to discuss your individual mortgage needs.