Understanding LMI can be critical in making informed decisions while buying a home. Let's bust some of the myths surrounding LMI and highlight the must-knows for first-time home buyers.
Fiction: LMI only benefits the lender
Many borrowers might feel that paying for insurance that doesn't directly benefit them is a waste of money. However, this is a common misconception. Lenders' mortgage insurance is used to protect the lender against undue risk. In reality, LMI enables lenders to grant home loans to borrowers with less than 20% deposit. This means that LMI can help you get onto the property ladder sooner than you thought was possible. By covering the lender's risk, LMI allows more people to secure a home loan that may otherwise have been unattainable.
Fact: LMI can help you get onto the property ladder sooner
Lenders' mortgage insurance can help you achieve your dream of home ownership earlier. The cost of LMI can usually be incorporated into the loan itself, making it a seamless process for the borrower. Borrowers can start building equity and working on their financial future a lot sooner without any upfront costs.
Fiction: All mortgages – and LMI – are the same
First-time buyers might slip into the trap of assuming that all mortgages and LMI are fundamentally the same. However, this is not the case. Some lenders offer green finance options, leading to more sustainable financial and environmental outcomes. Borrowers may have access to discounted interest rates if they buy, build, or renovate an eco-friendly home.
The criteria for such offers vary from lender to lender, and there will usually be qualifiers like having LMI in conjunction with a green mortgage or having eco-friendly features like solar panels, solar hot water, or long-term battery storage.
Fact: The cost of LMI is determined by the size of your deposit
The cost of LMI is influenced by various factors, with the main considerations being the size of the mortgage and the size of your deposit. The larger the mortgage and the smaller the deposit, the higher the cost of LMI.
However, the cost of LMI can usually be folded into the loan itself, so you won't need to pay the cost upfront.
Fiction: It's harder to get a loan approved with LMI
Borrowers might think that getting a loan approved with LMI is harder than without it. However, this is not the case. The criteria for a home loan are aligned with LMI, and lenders will be looking for the usual considerations.
In truth, LMI is a means to mitigate risk for the lender and improves your appeal with the lender as they have another layer of risk protection.
Fact: Having LMI can make getting a mortgage easier
Lenders' mortgage insurance can help borrowers who don't have a 20% deposit. It helps mitigate the risk for the lender and enables borrowers to get a foot on the property ladder in conjunction with other tools. Borrowers should remember that lenders will be looking for the usual considerations, and LMI should not be seen as a catch-all solution.
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In conclusion, understanding the role of LMI in the mortgage process and debunking the myths surrounding it can help first-time home buyers make informed decisions. LMI can help you get onto the property ladder sooner, but it is essential to consider all the options and factors involved in securing a home loan.
Published: Friday 10th February, 2023
Last updated: Thursday 4th May, 2023
