LMI and borrowing capacity for home loans
LMI and borrowing capacity
You’ve found your dream home but you don’t have a large deposit. What's your borrowing capacity?
What if it's not enough?
Here is when considering LMI or Lender’s Mortgage Insurance may be an option for you.
LMI is an insurance policy taken out by the mortgage lender to protect them from non- payment, however, you pay the premium.
How much depends upon the LVR or Loan Value Ratio.
Your LVI is determined by how much you have as a deposit as the higher the deposit, the less funds you need to borrow. The lender will minus your deposit from the purchase price of the property plus stamp duty to get your final loan amount. This is then divided by the value of the property. Any LVI under 80% will not require LMI as you have a deposit greater than 20% of the purchase price.
As every institution charges a slightly different amount, there is no formula to give you, however, there are a number of calculators online that will help give you a guide of how much you would need to pay.
Let’s look at a couple of examples. Say you have found a property that is $475,000 including stamp duty and you have saved $50,000. As a 20% deposit for this property would be $95,000, you will need to pay LMI if you want to go ahead with the purchase.
The loan amount is then $425,000
This is a LVR of 89.47% resulting in a LMI of $7,480 instead of saving another $45,000. Which, thinking about how long it took to save the first $50,000 may be a good option as property prices will continue to rise.
How about you had $70,000 for the same property.
Your loan amount would then be $405,000
The LVR is 85.26% and a LMI of $4,212
That it is only $3268 extra to borrow another $20,000. Note, the closer your LVR is to 80%, the less the premium is.
Now, LMI is not always the best option but it should be considered if it is the only way you for you to get out of the rental market and into your first home.
You need to weigh up how long it will take for you to save up the remained of your 20% deposit verses paying the premium as it does slightly increase your repayments as you borrowed a little more.
Not all mortgage brokers or lenders will tell you about this option and it will depend on your LVR if this should be strongly considered. Also, will you be able to comfortably afford those higher mortgage repayments or should you consider purchasing a property that is a little bit cheaper.
Although your deposit will impact the amount you can borrow, there are a number of other things that will limit your borrowing capacity:
- Dependants (up to a $50,000/ child reduction with some lenders)
- HECS/HELP Debt
- Car/Personal Loans
- Afterpay, zippay (shows you cannot budget)
- Credit Cards (total limit and amount owing)
- Living expenses
- Credit rating (how good you are at paying your bills on time)
- Job security (how long have you worked there? Longer than 12 months? Permanent or casual?)
In the end, you may be able to deal with of a few of these things to get your dream home. Chat with your mortgage lender or mortgage broker to find out what is the best option for you.
Developing your financial literacy will give you the freedom to achieve your life goals.