LMI was introduced by the Federal Government in 1965 to transfer the risk from the lenders to the insurers.

Without a 20% deposit, home buyers are usually required to take out LMI. Self- employed borrowers and non-residents may need to avail themselves to LMI to secure their loans, with the lenders deciding on this via a case-by-case basis.

LMI is required if borrowers are seeking a residential loan in excess of 80% and the cost to the borrower 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. However, in reality, it actually protects the lender if the borrower defaults on their loan.

LMI is usually arranged by the lender during the loan approval process. The cost is agreed upon between the lender and the insurer, and this cost is borne by the borrower. This is then added to the loan as a one-off fee, and is included in the borrower’s loan repayments.This essentially means that the borrower pays interest on the LMI premium. The rate of the LMI premium increases significantly at certain borrowing thresholds.

More young buyers are caging their parents for assistance. This has become increasingly prevalent over the past year as rising property prices pushed the amount of deposit required beyond the reach of many buyers. Usually, the bank of mum-and-dad “gifts” funds to get the loan under 80%, thereby avoiding LMI.

There are numerous pitfalls with this approach and all parties need to be fully aware before accepting parental assistance.

In some cases, lenders have reintroduced parental guarantees up to 15% of the purchase cost to assist their children into 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 then assessed on the borrower’s capacity to repay the total combined loan. Borrowers need to be aware of the implications of this.

For further information regarding LMI or if you have any questions about this scenario and how it applies to you, please do not hesitate to contact Paul on 0417 567 747 today.

 

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