Rethinking Lenders' Mortgage Insurance
Lenders' Mortgage Insurance (LMI) is typically seen as an additional cost when people buy a property. Some experts, however, think that investors can make LMI work for them. LMI is critical for the lender as it protects them if you're no longer able to pay your mortgage. But, how can LMI work in your favour as an investor? In this article, we're taking a look at how LMI comes into play for investors.
The LMI logic
If your loan-to-value ratio is higher than 80 per cent of a property's value, your monthly repayments will be higher than someone who paid a larger deposit, and you may be at higher risk of defaulting on your loan. This is the key reason why lenders require LMI — to ensure they are protected by the increased risk exposure of properties with high LVRs.
How is LMI calculated?
LMI is calculated in different ways, depending on the insurer. Your premiums will vary based on your loan amount, deposit amount, loan type and your employment status. Some property investment websites have LMI estimators, which can help you weigh up different options. Your mortgage broker may also be able to assist.
If you work in a high-demand and well-paying industry, you shouldn't have too much difficulty finding an LMI provider. Some LMI providers consider professions such as doctors, dentists and lawyers to be low risk and may waive the LMI on a loan.
Viewing LMI as an investment
While LMI is a lender's safety net for people who borrow more than 80 per cent of a property's value, some property investment experts, such as Mario Borg, Mortgage Broker and Director at Strategic Finance, believe investors should see LMI as an "investment rather than a cost".
For investors, LMI can help you buy a property when your deposit is lower than 20% of the property's value. This can help you to buy a property quickly instead of waiting to save up a deposit and missing out or being priced out later down the track. In these cases, it's helpful to calculate and analyse the cost of capital growth and LMI versus staying out of the market to keep saving a deposit and missing out, which can cost more than the LMI premium.
A good way to grow your portfolio
If you're an investor looking to grow your portfolio, LMI can help you secure your next property without using too much equity from your current property. This can help you add more properties to your portfolio faster and with a smaller deposit.
Remember, this article does not constitute financial or legal advice. Please consult your professional financial and legal advisors before making any decisions for yourself.