Refinancing, in its simplest form, is the process of replacing an existing loan with a new one, often with better terms. It's a strategy that many homeowners and property investors use to reduce their interest rates, lower their monthly payments, or tap into their property's equity. However, one aspect of refinancing that often catches borrowers off guard is Lenders' Mortgage Insurance (LMI).
LMI is a one-time, non-refundable fee that lenders charge to protect themselves against the risk of the borrower defaulting on the loan. It's typically required when the borrower's loan-to-value ratio (LVR) exceeds 80%, meaning they're borrowing more than 80% of the property's value. While it's a cost initiated by the lender, it's the borrower who foots the bill.
Now, you might be wondering, "Why should I care about LMI when refinancing?" Well, the answer is simple: it can add a significant amount to your borrowing costs. In fact, depending on the value of the property and the loan amount, LMI can run into thousands of dollars. Therefore, understanding how to avoid LMI can save you a substantial amount of money when refinancing.
To help us navigate the complex world of refinancing and LMI, we've enlisted the help of Shaun Bettman, who is the founder and director of Principal Mortgages, one of the best mortgage brokers in Sydney. With over 15 years of experience in the finance industry, Shaun has helped countless homebuyers achieve their dream of homeownership.
Shaun and his team are dedicated to finding the best home loan for each client. They offer a range of loan options, including fixed-rate loans, variable rate loans, and interest-only loans. Their services extend beyond finding the right loan; they also provide comprehensive financial planning and coaching to ensure clients are in the best financial position to buy a home.
Now that we've met Shaun, let's dive deeper into understanding Lenders' Mortgage Insurance (LMI).
What is Lenders' Mortgage Insurance (LMI)?
LMI is a fee that lenders charge to protect themselves from the risk of the borrower defaulting on the loan. It's initiated when the borrower's LVR exceeds 80%, but the specifics can vary from lender to lender. For instance, some lenders might require LMI for LVRs below 80%, while others might waive it for certain borrowers.
The cost of LMI is also variable. It's determined based on the property value borrowed, the loan amount, and the source of the borrower's contribution. This means that two borrowers with the same LVR might end up paying different amounts for LMI, depending on these factors.
One important thing to note about LMI is that it's non-transferable. This means that if you decide to refinance your loan with a different lender, you can't transfer your existing LMI policy to the new loan. Instead, you'll have to pay for a new LMI policy, which can add to your refinancing costs.
However, there are ways to avoid LMI when refinancing. One strategy is to select an LVR that doesn't require LMI. This typically means borrowing less than 80% of the property's value. Another strategy is to negotiate with the new lender. Some lenders might be willing to waive the LMI fee to secure your business, especially if you have a good credit history and a stable income.
In the next part of this article, we'll delve into more strategies to dodge LMI successfully.
Strategies to Avoid LMI When Refinancing
Let's dive into the meat of the matter - how to dodge LMI when refinancing.
Firstly, you can consider selecting a loan-to-value ratio (LVR) that doesn't require LMI. LVR is the amount of your loan compared to the value of your property. For instance, if you're borrowing $800,000 to buy a $1,000,000 property, your LVR is 80%. Most lenders require LMI if your LVR is above 80%. So, if you can keep your LVR below this threshold, you can avoid paying LMI.
But how do you do that? Well, you can either increase your deposit or decrease your loan amount. For example, if you can save up a larger deposit or find a cheaper property, you can lower your LVR. It's like shopping on a budget - you either save more or spend less.
Secondly, you can negotiate with your new lender. Remember, lenders are like any other business - they want to attract and retain customers. So, they might be willing to waive or reduce the LMI if you can prove that you're a low-risk borrower.
This is where having an experienced mortgage broker, such as Shaun Bettman from Principal Mortgages comes in handy. With his experience in the Sydney market, he can guide you through the negotiation process. It's like having a seasoned negotiator on your side, helping you get the best deal.
Potential Risks and the Importance of Suitability
However, it's important to note that avoiding LMI isn't without risks. For instance, if you borrow more than 80% of the property value, you might end up paying higher interest rates. Or, if you negotiate to waive the LMI, the lender might include the cost in your loan, which could increase your repayments.
In conclusion, avoiding LMI when refinancing in Sydney is like navigating a maze - it can be challenging, but with the right strategies, you can find your way out. By selecting a suitable LVR and negotiating with your new lender, you can avoid paying LMI.
However, it's important to consider the potential risks and ensure that the loan is suitable for your financial situation. With the expertise of professionals like Shaun Bettman, you can make informed decisions and successfully navigate the refinancing process.
Remember, refinancing is not just about getting a new loan - it's about improving your financial health. So, make sure to take the time to understand the process, consider your options, and seek professional advice. After all, as the saying goes, "Knowledge is power."