Lenders mortgage insurance (LMI) premiums are payable in two ways, an upfront fee, or by capitalisation. Capitalising your LMI premium essentially means adding it to the total loan amount, and paying it off in regular instalments with your home loan.
For most home purchasers saving a 20% deposit can be hard – and takes time. LMI allows property buyers to enter the market with a lower deposit. LMI is available for first home buyers, most other owner occupier buyers, and investors.
Basically, LMI is an insurance that protects the lender if your property has to be sold and there is a shortfall in paying out your home loan. All lenders require LMI (except specialist lenders) if you need to borrow more than 20% of the purchase price of a property. Your lending specialist is best placed to help you understand how LMI works, the cost, and how to get approved.
What is LMI capitalisation?
LMI capitalisation is the most common way of paying for LMI, with most borrowers opting for the monthly option. Depending on the amount you are borrowing and your deposit, in some cases, capitalising the LMI premium can be less than $23 a week extra, about the same as a cup of coffee a day, a relatively small sacrifice to make to own your own home.
How does LMI capitalisation work?
Let’s use newlyweds Steve and Jennifer as an example of how LMI capitalisation can work.
Newlyweds Steve and Jennifer are battling to save a deposit for their home, and currently spend approximately 32% of their combined monthly salary on rent. Paying rent is putting a real strain on their ability to save a deposit and after speaking with their lending specialist; Steve and Jennifer learn they can secure a home loan for up to 95% of the value of the property they hope to buy if they take out LMI.
Steve and Jennifer have saved $25,000 for a deposit and additional funds to comfortably meet the other commitments associated with their property purchase such as solicitor fees.
Keen not to miss out on the property they’ve decided to purchase, Steve and Jennifer’s lending specialist advises that they can capitalise their LMI premium which means adding the cost to their home loan.
Purchasing a home for $500,000 with a home loan of $475,000, the monthly repayments on their 30-year loan (3.13% pa example home loan rate) comes to approximately $2,037. The LMI premium on their $475,000 home loan comes to approximately $14,871. Should Steve and Jennifer elect to capitalise their LMI premium, it will increase their monthly home loan repayments by $63, taking the approximate total monthly home loan repayment to $2,100.
Whilst this increases the loan repayment, capitalising the LMI premium allows Steve and Jennifer to purchase their home without having to pay for the $14,871 LMI premium upfront.
Related post: How to secure a 98% home loan
How do I find out more about LMI?
The above is an example scenario of how LMI can work. There are a number of LMI providers and premium pricing can vary between lenders.
A lending specialist who has access to multiple options can provide you with information around your eligibility, quotes, and work with you toward your goals.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice. Credit criteria applies to any loan application. Terms and conditions, fees and charges apply.