Does LMI need to be paid upfront? How does LMI work? And is LMI a one off payment or an ongoing expense?
Buying your first home and wondering how Lenders Mortgage Insurance (LMI) works is natural. With the rising cost of living making it more difficult to save a 20% deposit, many first home buyers are turning to Lenders Mortgage Insurance (LMI) as the solution. Before you go down this same path, here’s what every first home buyer needs to know about LMI.
What is LMI and Why Do You Need It?
LMI is an insurance policy designed to protect the lender in case you default on your loan. It’s typically required when a borrower has a deposit that is less than 20% of the total purchase price, unless the borrower is eligible for an exemption through an approved government program (such as the Help to Buy initiative or the Home Guarantee scheme).
Does LMI Need to Be Paid Upfront?
So, how do you pay LMI and does LMI need to be paid upfront? While LMI can be paid upfront, most lenders will allow it to be added to the cost of your loan and then repaid over time (with interest).
Does LMI Need to Be Paid Upfront? Pros vs. Cons
Paying LMI Upfront – Pros:
- You won’t have to pay interest on the LMI premium
- Your monthly repayments will be slightly lower
- You’ll have a reduced loan-to-value ratio
Paying LMI Upfront – Cons:
- You’ll need to save enough to cover the upfront cost
- You’ll have less cash available for moving expenses and other costs
Adding LMI to Your Loan – Pros:
- You don’t have to pay a large amount upfront
- You can buy sooner, even if your savings are limited
Adding LMI to Your Loan – Cons:
- You’ll pay interest on the LMI premium
- Your total debt and repayments will be slightly higher
Is LMI a One Off Payment?
Unlike most insurance premiums, your LMI payment is only required once during your initial loan setup. However, if you decide to refinance or switch lenders before you have accrued sufficient equity, then you may be required to pay LMI again (since you’re essentially applying for a new loan).
How Do You Pay LMI?
Most lenders will offer flexible payment options for first home buyers who need LMI. This means you can choose to incorporate the cost into the value of your loan or pay it as a lump sum upfront. Before deciding on an LMI payment option, take time to consider how your choice will impact your current circumstances and future financial goals. If you’re unsure which option is right for you, ask an experienced mortgage broker: Do you pay LMI upfront or have it capitalised into your loan?
LMI Payment Tips for First Home Buyers
Before you start worrying about “does LMI need to be paid upfront?”, there are some things you can do to minimise or avoid the need for LMI. These include:
- Save a Bigger Deposit: Try to save as much as possible for your deposit, as a higher deposit can reduce the cost of the LMI.
- Try a Guarantor Loan: If you have a family member who can act as a guarantor, you may not have to pay LMI.
- Explore Government Schemes: See if you’re eligible for any government schemes that reduce or eliminate the need for LMI.
- Talk to a Mortgage Broker: A broker can explain how different deposit sizes will impact the cost of your LMI and help you find the best solution for your needs.
Do You Pay LMI Upfront? Ask a Broker
Still wondering, does LMI need to be paid upfront? Every situation is different, so the best thing to do is to talk to a broker for some free advice. At SCF Solutions, we’ll evaluate all the available options and make expert recommendations on how you can buy your first home.
For tailored advice on how LMI works and which lender options will suit your deposit size, contact the team at SCF Solutions today.
Meet Chris Wilson, the heart of Sunshine Coast Financial Solutions (SCFS). With over a decade of experience in finance, Chris started his journey as a broker with Aussie Home Loans in 2009. His dedication earned him the title of Rookie of the Year in 2010. By 2011, he was ready to build a business based on trust and strong partnerships.
