Many borrowers are pre-occupied with avoiding the cost of LMI. What is it and why, you ask? Read on and we’ll go through the basics.
What is LMI?
LMI stands for lenders mortgage insurance. That’s right – it’s not just home buyers who have be insured. LMI protects a mortgage lender in the unfortunate, but feasible, case where a borrower can’t meet their repayments and defaults on their home loan.
While it’s true a lender will hold the purchased property as security in case this should ever happen, it may not always be enough to cover the loss – if the value declines, for instance.
How does that affect me?
We’re getting to that! While LMI may be for the lender’s benefit, the one-off cost of purchasing it is passed on to the borrower as part of the home loan. LMI can end up costing thousands of dollars, so it’s not spare change we’re quibbling over here.
When does LMI get charged?
Typically, LMI applies only when borrowers take out home loans that are worth more than 80 per cent of the value of their properties, though different lenders and products might have different ratios. This is because the more of the value of your property that you borrow to pay, the riskier you are as a borrower.
What this means is that home buyers will want to save a deposit worth at least 20 per cent of the property price, in order to save themselves paying a few thousand more.
This sounds like a good deal for the lender.
Hey now, don’t be like that. The existence of LMI actually benefits borrowers as well. It means lenders are more likely to give home loans to a broader range of buyers, for one. And if you can’t save up the full 20 per cent deposit fast enough, but really want to nab that dream property, LMI means you can still get the loan you need.
Probably one of the most asked questions when it comes to buying a property or refinancing a property is “What Is My Property Worth?” When you purchase or refinance a property; your lender will ask for a valuation to confirm it’s value. When it comes to purchasing a property; some lenders may rest upon the contract of sale price; however most lenders will insist on a valuation.
There are times where a valuation will differ from the negotiated price. It rarely happens in private treaty sales; however is commonplace with auctions. Australia’s love affair with auctions has seen a dramatic increase in properties being sold “under the hammer” Vendors are encouraged to sell their property under auction as it gives them the best possible price for their property. Whilst this is great for the vendor; it can cause issues for the purchaser. One of these issues is the purchase price V’s the Fair Market Value.
Property Purchase Price V’s Valuation Fair Market Value
As you can see; the purchase price may differ from the Fair Market Value (FMV) You are probably asking yourself how this could be possible? Simply put; overzealous bidding at auction, or offering a sale price that is unusually high for the area that you are purchasing in (if you are purchasing via private treaty) will cause problems with the valuation. If the valuer does not agree that the purchase price is not the FMV for the area; then this will be reflected in their report. It is important to note that the lender will err on the side of caution and take the lower of the two values; so if the valuation comes in lower; this is the value that the lender will use.
Once you have negotiated a purchase price with the vendor or are the highest bidder at the drop of the hammer at an auction; your broker will request a copy of the contract of sale for the property that you have just purchased. If the lender that you are using requires a valuation on the property; your Broker will order the valuation or instruct the lender to request a valuation. The valuation will take approximately 2-3 days to be prepared and sent back to the lender/ Broker.
The reason why the valuation may come back lower than the negotiated purchase price is based on a number of factors:-
Recent sales of comparable properties in the last 3-6 months
Proximity to undesirable features in the area (such as power lines, busy roads, lack of public transport)
The valuers general local knowledge of the area/ street that you are purchasing
These are just some of the considerations that the Valuer will use to determine the fair market value.
On the subject of comparable sales; the definition of a comparable sale is a sale of a similar style of property (similar in size; both land and dwelling, similar finishes, similar floor space ETC) within the last 3-6 months. Just because the house next door sold for $600,000.00 two weeks ago does not mean that the house you are purchasing (or that you own) is worth that much; nor is it worth more if you feel that the house you are purchasing is superior to the one that sold next door.
How To Ensure That You Don’t Overbid Or Offer Too Much For The Property?
The best advice that I can give; especially if you are going to attend an auction is to either get an up front valuation before you attend the auction or negotiate on the property or request your Broker to provide you with a market report via reputable companies such as RP Data or Price Finder. South West Lending Solutions can offer market reports via both RP Data and Price Finder and are complementary (normally valued at over $60.00) for all clients regardless of if you are purchasing a property, refinancing or consolidating debts. Request your complementary report HERE
Not all lenders will allow upfront valuations as they are costly for the lender; although those lenders that do allow them will naturally use these valuations should you successfully secure the property.
In conclusion; I highly recommend that a valuation (if allowed by the lender) or at the minimum; a property market report is completed on the property that you are looking at purchasing prior to attending an auction or negotiating on a property.
Sam Zammit & South West Lending Solutions are authorised Credit Representatives (Credit Representative Number 470949) of PT Finance Solutions Pty Ltd. Australian Credit Licence Number 369034
The information contained in this website is of a general nature and doesn't take into consideration your personal circumstances. South West Lending Solutions recommend that you contact us to assess your individual needs.
We do not compare all lenders or loan products in the market; however we do have access to over 20 lenders on our panel.