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Lenders mortgage insurance: LMI

Lenders mortgage insurance or LMI as I've abbreviated it. Now what is lenders mortgage insurance and is it a friend or is it a foe.

Now, lenders mortgage insurance is basically a premium or an insurance policy that the banks make you take out on their behalf when you borrow over 80% of the property's value. So it's a premium that covers them as the lender, doesn't cover you at all. So do we pay it or do we not.

Now there's varying ways of thoughts around this. So if we're lending more than eighty percent of its value, there will be a cost associated which is an insurance policy, that the banks might say "Well if you're buying a property for $500,000, and your mortgage is going to be $450,000, we will charge you a five grand premium" (as an example). Now as an investor you might want to pay that as an opportunity cost to get you into the property market at that particular time. On the other hand you might say "No I don't want to cough up that premium policy amount, so I'm going to save myself a 20% deposit, loan myself eighty percent from the lender and then I will have a zero policy to pay".

So the question that I get a lot is "Do I pay it and put in a 10% or 10% deposit or do I wait and save my 20% deposit and avoid the lenders mortgage insurance". Now there's no right or wrong answer, it's just simply what's going to suit your situation at the time, but what I can say as an investor you may be able to capitalize that insurance amount into your loan and it's a one-off cost, and secondly, you may be able to claim the cost in your tax deductions but obviously you need to check with your accountant before you execute on that. Conversely, the safer option is to save your 20% deposit but that might mean waiting an extra couple of years before you can actually purchase a property.


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