Lender’s mortgage insurance (LMI) protects your bank or lending institution when you take out a mortgage where there’s a risk associated with your loan.
While LMI protects the lender only, it is an expense many property investors are willing to take on as it also offers them an advantage. The standard deposit on a mortgage that a buyer requires to make is 20 per cent of the property’s purchase price. Still, with LMI, some lending institutions are flexible in accepting lower deposits. As a result, buyers purchase the property(s) soon.
As an investor, you should know these essentials before taking out LMI:
A. It is Tax-deductible
According to Income Tax Assessment Act 1997, the entire Lender’s Mortgage Insurance premium, including GST and stamp duty, is a tax-deductible borrowing cost. When the LMI is contracted midway through the year, the deductible share corresponds to the property’s duration available in the market for rent.
B. In The Event Of Non-fulfilment, LMI Only Protects The Lender
If you default on your loan, LMI will cover your loan repayments to the lender. If this occurs, the insurer will then follow you for the funds.
C. You Cannot Claim It Right Away
You should keep in mind LMI cannot be claimed right away. Instead, it must be claimed over five years, commencing the date of settlement. However, you can claim the borrowing cost in the same year provided the expense was less than $100.
D. LMI Is Not A Practical Choice
Superficially, including LMI into the mortgage amount appears easy as you don’t have to get the funds right away, and the premium stays as a deductible cost. Nevertheless, you may then be paying interest on that insurance premium for 20 or 30 years. For instance, A $10,000 LMI premium at 3 per cent will cost you $300 per year in interest alone. Now, multiple this by 20 years, and you will realise the expense of LMI.
How To Avoid Paying LMI?
If you cannot save a 20 per cent deposit, you may ask someone to act as a guarantor as it will help you avoid Lender’s Mortgage Insurance.
A guarantor is liable for you paying back the mortgage if the borrower fails to repay. The property to be refinanced or purchased acts as partial security for the banks. The equity in the guarantor’s property contributes added security. Typically, the guarantors should be an immediate family member, though each lender may have their specific terms and conditions.
