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Explainer LMI or Risk Fees
LMI is short for Lenders Mortgage Insurance. It is required in many instances, most common when a loan is worth more than 80 per cent of a property’s purchase price. It is also applicable when refinancing in Difficult Financial Circumstances, buying a unit in in a High rise Building or in Alt Doc or Lo Doc Loans. In very basic terms, when a lender considers a loan to carry a high risk, LMI or a risk fee is likely to be payable. The LMI cost will likely scale to the amount of risk or deposit being paid. Here’s how you can avoid paying that costly premium.
Save for a higher deposit
The purpose of LMI is to protect lenders in case the borrower fails to make repayments and, when the loan-to-valuation ratio (LVR) exceeds 80 per cent, so the loan amount is more than 80 per cent of the value of the property being mortgaged, the risk of a lender not recouping their costs should the borrower default is increased. A higher deposit means a smaller loan amount, so will decrease the LVR and the perceived risk, and may be the key to avoiding paying LMI. A 5 % Deposit will have a higher LMI fee than say a 10% Deposit. This is something you should be comparing between Lenders as it can be thousands of dollars different.
Get a guarantor
If you don’t have the financial capacity to meet a 20 per cent deposit but still want to avoid LMI, you do have the option of getting a guarantor on your loan. Normally a close relative, such as a parent, guarantors can use the equity in their property to help you secure yours. In some instances, having a guarantor on your loan may mean that you won’t need a deposit at all.
Take advantage of professional benefits
Although special offers based on the borrower’s profession are not limited to medical professionals, doctors are the big winners when it comes to waived LMI fees. Due to the perceived stability and high income, some lenders consider professionals earning a minimum of $150,000 a year as ‘low risk’ borrowers and therefore offer them special loan benefits.
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