Thinking you're covered by LMI

Lender's Mortgage Insurance or LMI is required by lenders when you borrow at a certain loan-to-value ratio.

For instance, if you have a 10% deposit, chances are you'll be required to pay LMI, whereas if you have a 20% deposit you probably won't.

The common misconception surrounding LMI is that it protects the borrower if they can't meet their monthly repayments.

Unfortunately, this is not the case.

PMI protects the lender should you default on your mortgage.

In the event that they need to sell your property to recover their costs, but the sale price does not provide adequate funds to cover your outstanding debt, the insurer pays the lender the balance, NOT you!

This doesn't mean you'll be off the hook either.

The insurer, as well as the lender, will then chase you for the money you owe.

Get it right

LMI is not necessarily a bad thing, in fact for investors it can mean the difference between buying more property and making your own cash deposit stretch further.

If you want to be protected should you get into financial difficulty, there are products out there that can assist.

Lenders themselves often provide the option of buying mortgage insurance and of course, there's always income protection insurance should you find yourself off work for an extended period due to illness for example.

But the onus to organise and cover the cost of these products is on you – the borrower.

While applying for a loan and trying to gain an understanding of how the mortgage market really works might seem like a daunting prospect, it is possibly easier now than it has ever been with lenders competing vigorously for your business.

The key to getting it right and potentially saving yourself thousands of dollars is to separate the property financing fact from fiction and not be too focused on what a particular lender is offering, but on whether their product suits your specific requirements now and in the future.

RealRenta has all the tools that a property manager has but for less than ¼ the cost of a property manager.

Join now and the cost is less than a cup of coffee a week to manage your rental property

RealRenta also has a free vision, so why not check it out

Jason Gwerder
Thursday, 8 September 2022

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