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How to avoid paying Lender's Mortgage Insurance ("LMI")

How to avoid paying Lender's Mortgage Insurance ("LMI")

Lender’s mortgage insurance (LMI) is required in many instances when a loan is worth more than 80 per cent of a property’s purchase price, as well as in some other circumstances. In very basic terms, when a lender considers a loan to carry a high risk, LMI is likely payable. Here’s how you can avoid paying the 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.

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.

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What counts as genuine savings in a loan application?

What counts as genuine savings in a loan application?

If you apply for a home loan, particularly if the loan is for more than 80 per cent of a property’s value, you’ll more than likely have to prove to lenders that you have a satisfactory amount of savings. This is to demonstrate your ability to funnel a portion of your income into repayments.

Although it can differ, in most cases lenders generally look for consistent additions to savings over a period of at least three months and preferably a year or more. This means that the following are not considered genuine savings:● a cash gift● an inheritance● casino/other gambling winnings● proceeds of the sale of a non-investment asset ● government grants and other finance offered as incentives

Can I still get a loan without genuine savings?For those who don’t have any genuine savings but still want to obtain finance, there are options, these include:● Guarantor loans - Having a guarantor on your loan may mean that no deposit is required, with the equity or asset the guarantor stakes standing in for a deposit.● Other significant assets such as shares, managed funds and/or equity in residential property - Depending on your chosen lender, cash isn’t the only thing accepted as genuine savings. There are even situations where the sale of a vehicle can be considered as genuine savings if proved that it was owned for three months or more.● A strong rental record may see a lender allow you to forgo the genuine savings route - Some lenders will waive the requirements if a letter can be produced from a licensed real estate agent confirming that rent has been paid on time and in full for the preceding 12 months, as it highlights your ability to make repayments on time and on an ongoing basis.

“I regularly write loans for customers who do not have genuine savings using the aforementioned policy exceptions,” said the finance broker. “It’s just a matter of looking at their full situation and knowing which lender is going to have the policies to suit what you’re trying to achieve. This knowledge can only be achieved through experience and keeping in constant communication with lenders to know what their policy niches are.”Contact us today!

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Bridging loan or deposit bond?

Bridging loan or deposit bond?

When selling one property and purchasing another, the funds from the sale may not be available in time to use for the purchase deposit. There are typically two options in this scenario: a bridging loan and a deposit bond.

Bridging loan

A bridging loan is a shortterm home loan designed to allow you to initiate the purchase of a property before you have sold your previous one.

Loan terms are often between six and 12 months and bridging loans generally have a higher interest rate than traditional home loans.

This can be a great option but carries some risk. It’s important to know that you will be able to make the repayments even in a worst case scenario where your old house doesn’t sell as quickly as you’d hoped or where property values may change unexpectedly.

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