Should I purchase Lenders Mortgage Insurance?

Some stacks of coins with houses on them. The more money on the stack, the better the house is.
Some stacks of coins with houses on them. The more money on the stack, the better the house is.

Q: I am looking to purchase my first property as I have saved around $80,000 and am tired of paying rent on an apartment that I will never own. A couple of lenders have mentioned Lenders Mortgage Insurance on some of the higher-priced properties I am looking at and I wondered if you could explain how this works?

Joanna – West Leederville

A: Lenders Mortgage Insurance, or LMI, is an insurance to cover the lender in the event that you default on you loan.

Unfortunately for you, the borrower is the one required to pay the premium for this insurance, in the form of a lump sum LMI amount included in the initial loan. LMI is normally required if you have less than 20 per cent of the loan value – basically it is the lender saying that if you can’t save that minimum amount, there is an increased risk that you will default.

Based on your savings, you should be able to avoid LMI on anything under $400,000.

As I mentioned, there is no benefit to you in paying LMI so I would suggest delaying your purchase until you have a little more saved or looking at properties in a price range that won’t require LMI.

If you are looking at properties around the $400,000 mark, it is worth shopping around with different lenders as some might have slightly different criteria allowing you to avoid paying this insurance.