What is LMI?
Lenders Mortgage Insurance (LMI) was introduced by the Federal Government in 1965 to transfer the risk from the lender to the insurers. Without a 20% deposit, home buyers are usually required to take out LMI. Self-employed borrowers and non-residents may also need LMI in order to secure their loan, with the lenders deciding on a case-by-case basis.
LMI is required if you are seeking a residential loan in excess of 80% of the property value, and the added cost can be hefty. Many borrowers mistakenly believe that LMI is designed to protect them if they default on their loan, thereby enabling them to retain their house. In fact, it actually protects the lender if the borrower defaults on their loan.
THE RETURN OF THE PARENTAL GUARANTEE (FAMILY SUPPORT)
Recently, lenders have re-introduced the parental guarantee for up to 15% of the purchase cost to assist their children entering the real estate property market for owner-occupied properties without the need for LMI. The total loan, which is split into 2 loans, is assessed on the borrower’s capacity to repay the total combined loan. More young buyers are caging parents for assistance.
This has become increasingly prevalent as rising property prices have pushed the deposit required beyond the reach of many home buyers. Usually, the bank of mum-and-dad “gifts” the funds to bring the loan under 80% thereby avoiding the need for LMI. However, there are numerous pitfalls with this approach, and all parties need to be fully aware of the implications of parental assistance.
For further information regarding LMI or parental assistance, contact Paul on 0417 567 747 today.