Should You Invest in a Low Deposit Loan with Lenders Mortgage Insurance?

When it comes to buying an investment property, particularly for first-time investors, you may find yourself wondering if it’s worth taking out a loan with lenders mortgage insurance.

But what is lenders mortgage insurance (LMI), how does it work, and is there a way you can use LMI to your advantage when investing in property?

What is Lenders Mortgage Insurance?

When you borrow greater than 80% of the value of a property, the Bank requires you to pay a Lenders Mortgage Insurance Premium. Lenders Mortgage Insurance adds a premium to the home loan, which can usually be paid as part of your deposit, or worked into the cost of your total loan, similar to paying purchase costs including stamp duty etc.

This is a one-off cost that protects the bank if you cannot repay your loan and they foreclose on your property at a loss. This is separate from (and vastly different to) Mortgage Protection Insurance, which protects buyers and investors in the case of loan defaults because of illness, disability, death, or unemployment. Mortgage Protection Insurance is a voluntary insurance whereas Lenders Mortgage Insurance is a requirement of a low-deposit home loan.

How Does Lenders Mortgage Insurance work

Low deposit home loans are for those purchasers who don’t have the required 20% deposit of the purchase price.

Banks offer these potential customers the option of paying the minimum deposit, plus purchase costs and stamp duty. Lenders mortgage insurance is attractive to potential buyers who are looking to get a foot into the property market but don’t have the required 20% saved up.

For example, if you are purchasing a $400,000 investment property and have the required 20% deposit value of the property, you would need to contribute approximately $100,000 (20% plus purchase costs).

However, you may instead be able to finance that property with a loan of 90% of the property’s value and contribute 10% plus purchase costs including stamp duty and the mortgage insurance charge. This would bring the initial cost to $68,000, instead of $100,000 - which may allow you to enter the property market sooner.

It is important to speak with a mortgage professional to ascertain which option is best for you.

How You Can Use Lenders Mortgage Insurance to Your Advantage

If you are looking to invest in multiple homes, you can use low deposit home loans and lenders mortgage insurance to your advantage.

In this simplistic example, if the investor had $180,000 in cash (or more likely equity in their home) using low deposit home loans they could finance the purchase of properties totalling as much as $1,200,000 (e.g., 3 properties, each for $400,000). Whereas, if borrowing only 80% against each property they could only finance properties totalling $720,000.

There would be a cost in doing this. In the above example where the investor is borrowing 90%, they would have to pay a mortgage insurance premium. That premium would be approximately $5,000 per property. However, some banks will allow you to add this to the loan amount, so you are essentially borrowing the amount to pay the fee too. And you may find that the cost of the fee (and subsequent interest on it) is tax deductible for investors.

The difference in borrowing amounts is likely to have a significant impact for investors who wish to develop a property portfolio quickly.

Learn Whether Lenders Mortgage Insurance is Worth It For You

If you’re thinking about using low-interest home loans with mortgage lenders insurance, make sure you seek advice from a financial expert. In addition, the mentors at Young Investors Club are here to help you research the best opportunities to help you get into property investment. Our mentors can help you bust common property investment myths and find the right information for you.

Contact Young Investors Club today to become a member and connect with your next property investment mentor.