Q. My friends who invest are split firmly into two camps: those who believe lender’s mortgage insurance (LMI) is a ‘necessary evil’ which helps them get more properties sooner, and those who think it’s an additional cost which should be avoided. Do you think investors should try to avoid LMI?
A.I’m sure most people would rather not pay lender’s mortgage insurance if they had that option, but avoiding LMI isn’t something that people can always do. It depends very much on people’s circumstances at the time.
I also call LMI a bit of a ‘necessary evil’. Many, many years ago if you didn’t have a 20 per cent deposit, you simply couldn’t buy a property. So at least now if you want to borrow 90 per cent, or even in some cases 95 per cent, of the value of the property lenders will allow you to do that. The price you pay for that higher loan-to-value ratio (LVR) is the cost of mortgage insurance. So it is kind of a necessary evil.
Sometimes people, particularly investors, would prefer to keep some cash up their sleeve for the next property or maybe to do some renovations on the property they’re buying. So therefore it may be prudent to spend $10,000 or so on mortgage insurance, especially if it enables you to keep an additional say $50,000 for your renovation projects or to save some extra cash as a deposit for your next property purchase.
So it’s very much a case-by-case situation and one which you need to spend time thinking about. A mortgage broker is well placed to help you chat through your options.
Stephanie Cook, owner and lending consultant, Mortgage Choice North Shore