Buying property almost means learning a new language. One of the most common acronyms is ‘LMI’. LMI is a term used by banks, lenders, mortgage brokers, accountants and financial planners when discussing buying a property and your loan requirements. But what does LMI mean and why do you have to pay it?
Definition of LMI
LMI stands for Lenders Mortgage Insurance and is a one-off insurance payment which protects the mortgage provider (banks and lenders) with an extra level of protection against mortgage default. LMI is generally paid when the LVR is over 80%.
How much can LMI cost
There are two main LMI providers in Australia; Genworth and QBE. The amount of LMI payable will depend on the location and LMI provider. LMI can range from $1,500 up.
We have seen clients paying over $30,000 in LMI.
How do I pay for LMI
The cost of LMI can be paid two different ways.
- Separately at settlement by yourself
- Added to your final loan amount.
Paying LMI separately at settlement will require you to have the funds available and provide the lender with an explanation of where the funds will come from.
Adding the cost of LMI to your final loan amount is the most common way to pay for LMI. Often the final LVR (including LMI) is determined by the LMI provider.
Is LMI when purchasing an investment property a claimable expense
The ATO currently states that you can claim LMI as a tax deduction when purchasing an investment property. LMI is considered a purchasing expense that is deducted over several years, not all in the first year. For further clarification around what you can and can not claim as tax deductions visit the ATO’s website or contact your investment property savvy accountant.
How to avoid paying LMI
Avoiding LMI can save you thousands of dollars can be avoided by having 20% of the purchase priced property available. The most common forms of a 20% contribution to a purchased property are;
- money you have saved over a period of time
- a family member willing to be a guarantor for your loan