Building a home is the dream of many Australians, however, it’s an expensive proposition. Most people will need to take out a construction loan to afford the costs. When it comes to getting a loan, there’s a little more to it than simply asking for the loan amount and getting the money. In some instances, you may have to pay a lender’s mortgage insurance (LMI). What is that, you ask? Read on to find out.
What is LMI & why is it required?
Lenders Mortgage Insurance (LMI) is an insurance taken out by the lenders of a loan. LMI can factor into a home loan, fixed or variable interest loan, construction loan, land loan or really any loan. The purpose of an LMI is to protect the lender in the event the borrower (in this scenario, you) cannot make loan payments. The borrower makes a one-off payment to cover LMI before construction begins. We cannot stress enough that LMIs cover the lenders, not you. So with that in mind, what benefit is an LMI to the consumer?
LMI allows more people to get home, as it provides the lender with a safety net. Usually, if you’re looking for a loan but don’t have the money to cover the initial deposit (around 20%), you’ll find it difficult to find a lender willing to provide you with the loan amount. An LMI provides insurance to the lender if you’re unable to make a payment. This security makes them more comfortable lending to a wider range of people in different financial situations.
Is LMI applicable to home construction loans?
It will depend both on your financial situation and the lending criteria of your lender. Usually, an LMI will be a requirement for anyone with an LVR ( loan-to-value ratio) greater than 80%. It’s usually essential for you to pay a 20% deposit on your loan to avoid an LMI on your loan amount.
What’s an LVR?
A loan-to-value ratio is a key way lenders will measure your financial situation and determine factors of your loan. The ratio is the loan amount to your property value conveyed as a percentage. To find this ratio, the home loan amount is divided by the bank’s property valuation, times 100.
Considering a major renovation instead of building a new home? Read our Renovation vs Knockdown Rebuild article to find out why renovation can end up costing more than you may expect.
How much LMI will you need to pay on a home construction loan?
The cost of your LMI will be calculated based on the loan size, the size of your deposit, the purpose of your property (are you renting or planning to live in the home) and the lender’s insurer. Many sites offer an LMI calculator that while providing an actual, legally binding quote, can at least provide an idea of how much you’ll need to pay.
How can you avoid paying LMI on a home construction loan?
There are ways you can avoid paying lenders’ mortgage insurance on your construction loan which is:
- Save so you can your deposit: If you have enough money to save a 20% deposit, you should be able to avoid LMI. Obviously, with the cost of living going through the roof lately, this is sometimes easier said than done.
- Compare lenders: Different businesses will have their own eligibility criteria so you may find another lender willing to waive the LMI for your loan. There may be a lender who’s happy to accept a 15% deposit without an LMI.
- Have a relative be your guarantor: A guarantor is usually a family member or friend who is willing to put their home up as equity to cover the cost of your deposit.
- See if you qualify for government schemes: It’s always worth checking if there are any government grants or schemes that could ease the financial burden. Some of these include the First Home Buyer’s grant.
Our tips for managing your budget when building a new home
- Sort out your budget before anything else. Knowing how much money you have and what you can realistically afford to pay back over time.
- Talk to a financial advisor so can plan your budget. They’ll be able to advise you on construction loan options, and strategies for paying interest and repayments.
- To apply for a construction loan you’ll need documentation such as proof of income, building plans for your licensed builder, necessary council permits, and more.
- Talk to a building consultant. At Buildi, we offer impartial advice on all aspects of the construction industry and help you avoid making any crucial mistakes.
Buildi is here can help with your
Building a new house is one of the biggest projects you’ll ever undertake, but luckily, you don’t have to take the journey alone. Buildi is a client advocate who’s here to ensure you find the best builder for your project and that everything in your contract is met. We’ve saved our clients time, stress and money by helping them avoid common mistakes and make the right decisions.
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