Do you pay LMI on an investment property?

Yes, you may need to pay Lenders Mortgage Insurance (LMI) on an investment property under certain circumstances. LMI is a one-off insurance premium that protects the lender in case you default on your loan. Here are the key points regarding LMI for investment properties:

When LMI is required?

Loan-to-Value Ratio (LVR) - LMI is typically required if the LVR is above 80%. The LVR is the loan amount compared to the property’s value. For example, if you are borrowing more than 80% of the property's value, LMI is likely to be required.

Investment Properties - the same LVR threshold applies to investment properties as it does to owner-occupied properties. If you do not have a deposit of at least 20% of the investment property's purchase price, you will likely need to pay LMI.

How is it calculated?

The LMI premium amount is calculated based on the LVR and the size of the loan. The higher the LVR and the larger the loan amount, the higher the LMI premium. LMI can be paid as a lump sum at the time of settlement or capitalised (added to the loan amount), which means you’ll pay it off as part of your mortgage repayments.

Benefits and considerations

Lower deposit - LMI allows you to purchase an investment property with a smaller deposit, enabling you to enter the market sooner.
Cost - LMI can be expensive, and it’s important to factor this cost into your overall investment budget.

Example scenario

- Property value = $500,000
- Deposit = $50,000 (10% of the property value)
- Loan Amount = $450,000
- LVR = 90% (Loan amount / Property value)

In this scenario, because the LVR is 90%, LMI will likely be required. The LMI premium will depend on the lender's specific rates and policies.

Tips to avoid LMI

1. Higher deposit - aim to save a deposit of at least 20% of the property’s value to avoid paying LMI.
2. Guarantor loan - some lenders offer guarantor loans where a family member can provide a guarantee secured against their property, potentially reducing or eliminating the need for LMI.
3. Negotiate - some lenders may be open to negotiating the terms, especially if you have a strong financial profile or a good relationship with the bank.

While LMI can enable you to purchase an investment property with a lower deposit, it is an additional cost that should be carefully considered in your investment planning. Consulting with an experienced mortgage broker or financial advisor can help you understand your options and make the best decision for your circumstances.

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