Lenders’ mortgage insurance, or LMI, is sometimes seen as an additional cost when buying property – but experts believe investors can make it work to their benefit.
Property investments entail heavy financing, posing a great challenge to buyers. But funding these investments also exposes lenders to risks – especially if circumstances mean a borrower can no longer make mortgage repayments.
This is where LMI comes into play as it protects the lender from financial loss.
LMI as lenders’ safety net
Lenders require LMI if the amount being borrowed is more than 80% of the property’s value. The belief is that the risk of borrowers defaulting on their loans is higher for those who pay less deposit as their monthly repayments would also be higher compared to those who can pay a larger deposit.
LMI providers also conduct background checks to see if a borrower can afford to make monthly repayments. This gives lenders assurance that the borrower can take on the financial responsibility of purchasing a property.
LMI as “investment rather than cost”
Despite solely protecting lenders, many investors are willing to take LMI as it also gives them an advantage.
Mario Borg, mortgage broker and director at Strategic Finance, explained in his blog that investors should view LMI as an “investment rather than a cost.”
“LMI can be a real enabler for borrowers,” he said. “For investors, this can assist in buying the next investment property sooner rather than waiting to come up with more cash for a larger deposit.”
Borg stressed that time is of the essence when it comes to property investments and waiting longer to save for a bigger deposit may come at a cost to investors. Property values can rise exponentially in a span of a few years and this can cost investors considerably more than the LMI premium.
“Minimising your borrowing cost should always be a priority for you, however, in some cases the cost of LMI may be worth incurring as a cost of doing business,” he said. “The cost of missing out on an opportunity will be much greater over time when compared to the one-off LMI cost that you may incur upfront.”
Meanwhile, Konrad Bobilak, chief executive officer and founder of Investors Prime Real Estate, explained in his vlog how LMI can be the “best investment” investors can make.
“LMI is the best investment… to make if you’re a property investor who has a strategy of continuous accumulation of properties,” he said.
Bobilak added that property investors aiming to “maximise their portfolio” can benefit from taking LMI as it can give them the opportunity of “buying more properties faster” while “using less deposit.”
Your Investment Property has also listed important facts about the LMI that can help guide property investors in their investment journey.
How is LMI calculated?
Each insurer calculates LMI premiums slightly differently. The cost varies depending on the size of the loan, deposit amount, loan type and borrower’s employment status.
Your Investment Property’s LMI estimator can help you with the calculation.
It is also worth noting that LMI providers are generally willing to lend more money to people in high-demand and well-paying professions. Doctors, dentists and lawyers, for example, are considered low-risk borrowers and may even be eligible for an LMI waiver.