What Is Lenders Mortgage Insurance (LMI)
It’s easy to assume that NZ property prices will keep increasing.
Though there’s always a chance that a market ‘correction’ will see prices stabilise (or even drop) in the future, even if a global pandemic hasn’t been able to reign in property price increases.
Whether you’re a first home buyer or potential investor, it’s natural to want to get into the market as soon as possible. Rock-bottom interest rates make the prospect of owning a property much more realistic too.
For most buyers, the biggest hurdle to catching the property wave is saving for the initial deposit. With the average house in Auckland selling for $1,352,677, saving for a 20% deposit ($270,535 of that figure) can seem impossible. If you add all the buying costs, such as legal fees and property inspections, you’re looking at approximately four-to-five years of average income.
This is where Lenders Mortgage Insurance can help!
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) protects the bank if you are unable to meet the repayment on your mortgage. Your lender takes out insurance to cover themselves for any losses they suffer if you can’t meet your mortgage repayments. Financial institutions (as you might expect!) pass this insurance cost onto the borrower – you.
Although the term “LMI” is often used, especially in conjunction with Housing New Zealand’s First Home Loan Scheme, it is also often referred to as a low equity premium (LEP).
It’s important not to confuse LMI with mortgage repayment protection insurance. Mortgage repayment protection insurance is optional and provides cover for your mortgage repayments if you become sick or disabled, die, or lose your job.
LMI/LEP is not optional. If you are borrowing more than 80% of the house value, you will have to pay it as extra interest (as your equity grows, you can apply for the LMI to be reduced and, ultimately, dropped), or an additional one-off charge (sometimes it could be added on top of your mortgage to reduce initial costs).
LMI – The main benefits
- With LMI, a lender will be willing to offer a larger loan, meaning you require a lower deposit. If you have stable employment, good credit history and decent savings, you’re in a good position to ask a lender to cover you for a lower deposit. Don’t expect miracles, but shaving 5% or even 10% off the required deposit can suddenly make property purchases more realistic.
- When property prices are on the rise, time spent out of the market is potentially time missing out on capital growth. If LMI means getting into the market sooner, it can pay for itself through the additional capital gain, plus, while your loan (and therefore your repayments) will be higher, consider that it’s also time spent not paying rent.
LMI/LEP costs money. The cost varies based on the loan amount and the Loan to Value Ratio (LVR). The cost could vary from 0.25% to 2%.
For this example, let’s use 0.75% LMI/LEP, a loan of $600,000, 30 years loan term and a standard rate of 3%.
LMI: Your interest rate will be 3.75% which means your repayment will also be higher than what would have been on the 3% rate.
LEP: You will incur a one-off fee of $4,500 and potentially get the 3% standard rate.
Can you avoid or reduce the LMI/LEP?
Yes, you certainly can!
- Grow your deposit
- Ask your relatives to gift funds
- Ask your parents or siblings to act as a guarantor
Talk to us
Ensure you do plenty of research before making a purchase decision. Investigating your options, home loan products and working out whether to buy now or save extra for your deposit are decisions that our experienced mortgage advisers can help you with.