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.
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is less than a cup of coffee a week to manage your rental property
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Jason Gwerder
Thursday, 8 September 2022