What is the difference between paying LMI from savings vs. adding it into the loan?

A bank is offering me a mortgage at 90% LVR including LMI, meaning the LMI can be added into the loan but it reduces the amount of the loan going to the property. The effect of which means I’d need to fund the shortfall I.e. the amount of the LMI.

e.g. $1m purchase, $900k loan but it includes LMI of $22k. So my deposit would need to be $100k PLUS the $22k to fund the shortfall of the loan since $22k went to LMI.

So I can’t see how there is a benefit for putting LMI into the loan as opposed to paying out of pocket.

What am I missing?

 

Ask your bank to run the numbers on a 12% deposit with LMI capitalised and see if that changes the LMI cost applicable.

 

A friend and I have the same question.

I've heard some people describe that your initial outlay would remain $100k, and your loan amount would be $922k ($900k for property + $22k LMI), but would this not push your LVR over 90% and, if so, is that ok?

 

It is basically the same but there could be a slight difference in LMI

 

Or significant!

 

Well actually your total LVR would be over 90% as you're adding the 22K on top, so LVR would be 92.2%
Only $900K goes towards the purchase.
You need a lender that allows 90% + LMI to do it, plenty of options for Owner Occ purchase, not so many for Investment.

 

The difference is with their proposal you'll pay LMI on an 88% loan. Your way you'll pay LMI on a 90% loan.

By paying LMI on 90% you're not only paying LMI on a larger loan, the percentage of the loan for which LMI is calculated is higher. If you do it this way the LMI premium will be signfiicantly more than the $22k the bank is quoting you, by several thousand dollars.

 

Can differ significantly. When I recently bought my PPOR, due to either a St. George error or a broker error, I ended up having to pay LMI cash out of pocket which I only found out the day before settlement (long, aggravating story, don't ask). Because of this, my LVR was reduced making my LMI around $12k less from memory. Came down from $30k to $18k. Would I have still rather capped it into the loan at $30k? Probably not in hindsight given cashflow was okay, but I could have run into problems early on. Point is that make sure you know the numbers, really check the small print, & try to get paperwork watertight early on - & do not rely on either banks or brokers to make sure everything is as should be, because they're still human at the end of the day.

 

@Morgs and @Peter_Tersteeg replies made the penny drop.

My understanding now is it is smarter to include the LMI into the loan, and pay the shortfall in the deposit since my deposit 'grows' which reduces the LVR and hence reduces the LMI.

So back to my example:
$1m purchase
$118k deposit ($100k for the 10% deposit + $18k for the shortall in the loan that funded LMI)

Compared to:
$100k deposit
$22k LMI

 

Here's a post I wrote last year that gives you the specific detail with a breakdown of the figures from a live example at the time.

Why a 90% loan is really 88% + LMI

 

Super clear example, thank you!