Lenders mortgage insurance (LMI) premiums are payable in two ways: as an up-front fee or by capitalisation.
Capitalising your LMI premium essentially means adding it to the total loan amount and paying it off in regular instalments with your home loan. This will mean you are also paying interest on the LMI for the life of the home loan, so are likely to pay more. Capitalisation is the most common way of paying for LMI.
How does capitalisation work?
Newlyweds Tim and Erica are battling to save a deposit for their home, and currently spend approximately 32 per cent of their combined monthly salary on rent.
Paying rent is putting a real strain on their ability to save a deposit and after speaking with their mortgage broker, Tim and Erica learn they can secure a home loan for up to 95 per cent of the value of the property they hope to buy if they take out LMI.
Tim and Erica have saved $25,000 for a deposit and additional funds to comfortably meet the other commitments associated with their property purchase such as solicitor and application fees.
Keen not to miss out on the property they’ve decided to purchase, Tim and Erica’s broker advises that they can capitalise their LMI premium which means they can buy the property sooner but it will add to the cost to their home loan.
Purchasing an apartment for $400,000 with a home loan of $375,000, the monthly repayments on their 30-year loan (rate 5.22 per cent) comes to approximately $2,064. The LMI premium on their $375,000 home loan comes to approximately $11,400. If Tim and Erica capitalise their LMI premium, it will increase their monthly home loan repayments by $63, taking the total monthly home loan repayment to $2,127.
Buying a property sooner using LMI means they will no longer be paying rent which in some cases may be more than the mortgage payments inclusive of capitalised LMI.
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