Is LMI Stopping You from Refinancing?


July 18, 2017

Is LMI Stopping You from Refinancing?

Refinancing can reduce the overall cost of your loan by thousands of dollars – and even more depending on the details of your new loan. This is, unless you end up having to pay lender’s mortgage insurance, or LMI, for the second time.

LMI can, on its own, cost several thousand dollars, a fact you may already be familiar with if you’ve had to fork out thousands for LMI for your current loan. Paying this in addition to the normal costs of refinancing, such as exit fees, and fees for your loan application, valuation, and settlement, can make refinancing much more expensive than it needs to be.

Is LMI on Refinanced Home Loans Fair?

This is a good question. On one hand, lender’s mortgage insurance is a reasonable cost considering the risk your lender is taking on by lending you money to pay back a huge sum of money over such a long period of time. Without this protection, banks would be forced to implement stricter lending policies and would have to turn down more loan applications. Not only could this stop you from purchasing a home loan, it would stifle the real estate market. Imagine if only borrowers who have enough to put down a 20% deposit were able to buy property.

Paying LMI a second time is where this expense loses its credibility. However, it is common practice to require insurance when you refinance if you are refinancing at 80% of the loan to value ratio or greater.

What About LMI Rebates?

You can get a rebate on your LMI when you refinance. In fact, this is something you should put on your to-do list when you refinance. It is up to you to request a rebate. Your insurance provider isn’t going to send it to you without a request. According to Peter White, president of the Finance Brokers Association of Australia, the most that you’ll get back is 40%.

Unless you refinance early into your loan, you may not be eligible for an LMI rebate at all. Some policies only allow you to claim a rebate if you do it within a set period of time, such as 12 or 24 months.

How to Cut Your LMI Refinancing Costs

There is one sure way to not pay for lender’s mortgage insurance a second time around. Refinance for less than 80% of the property value. The lower your LVR, the better. You can do this when:

  • You have built up enough equity in your home
  • You’ve saved up enough money to put down a large deposit, which when combined with your built-up equity may help you avoid LMI
  • Your property value has changed. If your home’s value changes, you’ll still have to pay off the original amount of your home loan, but you may have more equity.

LMI is one of the largest costs of refinancing. If you can avoid it, or at least can get a rebate, you’ll reduce the cost of refinancing and realise the savings benefits within a shorter amount of time. Also, keep in mind, the better position you are in when you apply to refinance, including your credit history, income level, and how much you have in equity and savings to put down as a deposit, the less you’ll have to pay in lender’s mortgage insurance in the first place.

Don’t let LMI stop you from refinancing if you stand to benefit. But, do take your time to compare lenders and evaluate the total cost to benefit from refinancing now.


Written by Refinancing.com.au

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