So what is Lenders Mortgage Insurance (LMI)?
And is it friend or is it foe?
Now, Lenders Mortgage Insurance is basically a premium or an insurance policy that the banks make you take out on their behalf when you borrow over 80% of the property’s value. So it’s a premium that covers them as the lender, and actually doesn’t cover you at all.
So do we pay it or do we not?
There are varying ways of thoughts around this.
Here’s an example/scenario for you. So if the bank is lending more than 80% of the property value, there will be a cost associated with it, which is an insurance policy. The bank might say “Well if you’re buying a property for $500,000, and your mortgage is going to be $450,000, we will charge you a $5,000 premium”.
Now as an investor, on one hand you may want to pay that as an ‘opportunity cost’ to get you into the property market at that particular time. On the other hand you might say “Hell no, I don’t want to cough up that premium policy amount, so I’m going to save myself a 20% deposit, loan myself eighty percent from the lender and then I will have a zero policy to pay”.
So the big question I get a lot during my one-on-one Clarity Calls (or one on two if there are couples or partners involved) is “Do I pay the Mortgage Insurance and put in a 10% or 15% deposit, OR do I wait and save my 20% deposit and avoid the lenders mortgage insurance”?
Now there really is no right or wrong answer, it’s just simply what’s going to suit your situation at the time, but what I can say as a property investor is you may be able to capitalize that insurance amount into your loan and it’s a one-off cost, and secondly, you may be able to claim the cost in your tax deductions, but obviously you need to check with your Accountant before you execute on that.
The safer option naturally would be to save your 20% deposit and avoid any LMI BUT that might mean waiting an extra couple of years before you can actually purchase a property – and the best time to purchase is now.
Book in a Clarity Call with me if you’d like to chat about your own personal situation further.
John Pidgeon
