Mortgage Insurance – Happiness vs Not Happiness

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One of the concerns some people have in buying property is how much Lenders Mortgage Insurance (LMI) they have to pay to the bank.

Before we talk about that – let me explain what it is first.

LMI is insurance paid by the borrower to protect the bank in the event of default, when the borrower doesn't have a lot of equity or cash to tip into the deal. In Australia, mortgage insurance generally kicks in where a borrower has less than 20% deposit. The higher the LVR, the higher the risk, and the higher is the insurance premium payable by the borrower. It's a one-off premium, payable when the loan is taken out.

Some people just hate paying it – and fair enough I suppose – it's an insurance premium that you have to pay that doesn't protect you (interesting!). However, usually it can be added to your loan so it doesn't have to come out of your pocket, and is tax-deductible for investors over a number of years (check with your accountant), so that reduces the pain a bit.

But most importantly, what it does allow you to do is to maximise your leverage! Leverage is a wonderful thing, especially for an investor – because you get other people's money working for you. Yes, you pay a price for that – but if you have a deal that is going to be profitable anyway, wouldn't you be better off paying it than getting stuck in your paradigm and losing an opportunity?

The logical answer is "Yes". Do the numbers – if your gain is worth the price you have to pay, do it.

For a home buyer – it could mean the difference between buying your dream home or not. Happiness vs Not Happiness. I know what I choose.

You can't beat Happy! Have a great day!