Lenders Mortgage Insurance (LMI) is a once off insurance fee that protects the bank, not you in the event that you default on your loan.
LMI is paid when your loan is settled and generally does not affect your interest rate but can affect your home loan repayments as it can be added (or capitalised) to the loan which means you don’t need to pay for it up front.
In this article we cover:
- Why do you need Lenders Mortgage Insurance?
- Who does Lenders Mortgage Insurance Protect?
- What are the benefits of Lenders Mortgage Insurance?
- What are the downsides of LMI?
- Do you pay LMI when refinancing?
- What does Lenders Mortgage Insurance Cost?
- Try the Lenders Mortgage Insurance Calculator 🔢
- Why is LMI so Expensive?
- How to Avoid LMI
- Can I get an LMI Refund?
Why do you need Lenders Mortgage Insurance?
Banks require lenders mortgage insurance for high-risk loans, for example borrowing a high percentage of the property value and when you have a lower deposit.
As a general guide when lending over 80% of the property value (also known as loan to value ratio) the lender’s mortgage insurance will become applicable.
In other words:
You’ll pay LMI if you have less than a 20% deposit.
For self-employed clients wanting to apply for a low doc loan, due to not being able to prove income, then lenders mortgage insurance will apply once lending over 60-70% of the property value.
The premium charged by the insurer varies depending on the loan amount and the property value.
Who does Lenders Mortgage Insurance Protect?
Around 20 per cent of the home loans in Australia get LMI coverage, but still, not many buyers are aware of what it actually is and why is it charged by a lender.
Lender’s mortgage insurance or LMI is a type of insurance that provides protection to a lender (home loan providers and banks) against any risk of default by the borrower. Some borrowers have a misconception that they pay this for their own protection.
One study has shown that 40 per cent of the people do not know what lender’s mortgage insurance is.
2018 white paper by Mortgage Choice and Core Data’s Evolving Great Australian Dream showed that 42 percent of 1000+ respondents did not know what LMI is, whereas, 32 percent saying that they need it to purchase a house. 18 percent of the respondents believed that it is designed to safeguard both buyers and sellers, 8 percent said that it protects borrowers, whereas, only 32 percent knew exactly why they needed this insurance.
What are the benefits of Lenders Mortgage Insurance?
LMI can be quite useful when property values are rising because an additional year in the real estate market can be translated into an increase in the home equity level, which will cover the cost of the lender’s mortgage insurance.
It allows you to get into the property market with a lower deposit, like having less than 20% of the property value and means you can get in sooner rather than having to wait and save up a big deposit.
Read More: 11 Hidden Costs of Buying a Home
What are the downsides of LMI?
The cost of LMI can be quite significant and in many cases, it restricts a borrower from refinancing as they would have to pay this cost again if LVR (loan to value ratio) remains over 80 per cent. Read more about how to calculate LVR.
Moreover, it also decreases the overall return on investment and cannot be refunded.
In other words, once you pay LMI on the loan when you go to refinance or sell the property it is a cost that has to be paid upfront on the loan.
Do you pay LMI when refinancing?
You need to pay LMI when refinancing with another bank if your loan to value ratio, or LVR is above 80%. Unfortunately, you will need to pay Lenders Mortgage Insurance when refinancing your loan even if you paid it when you initially purchased your property.
For example, if you were wanting to refinance your home valued at $600,000 and you owed $500,000 the LVR would be calculated as 83.33% and being over 80% LVR you would need to pay LMI.
Read More: 7 Reasons to Refinance your Home Loan
What does Lenders Mortgage Insurance Cost?
Lenders Mortgage Insurance costs vary depending on the lender.
Lenders Mortgage Insurance is priced on a sliding scale, the higher your deposit amount the lower the insurance costs. So for example a home purchase of $600,000 with a 10% deposit ($60,000) will mean you’ll end up paying around $10,000 in LMI – but the higher the loan amount, and the lower the deposit the more this goes up.
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These costs change significantly across different banks, so in the same $600,000 purchase scenario, we mentioned above comparing 7 different lenders you can see there is a difference in cost from the cheapest ($10,301) to the most expensive ($16,121) of over $6,000!
Read More: 11 Hidden Costs of Buying a Home in Brisbane
Try the Lenders Mortgage Insurance Calculator
Using our Lenders Mortgage Insurance calculator you can work out what LMI will roughly cost on your home, to purchase or refinance. Just enter the estimated purchase price (or property value) and how much you would like to lend and we will calculate the LMI for you.
Our LMI Calculator also looks at ways of Avoiding Lenders Mortgage Insurance based on your job type – if you are a Doctor, Medical Professional or work in a few other types of professions you may be able to have LMI Waived. Talk to our team to find out more.
Use the LMI Calculator above. ☝️
Why is LMI so Expensive?
Lender’s mortgage insurance is very expensive as it represents a significant cost to the loan.
Therefore, whenever you plan to buy a house, it is important to seek the advice of a financial expert or a real estate broker as they will be able to guide you in the right direction, keeping your financial goals in mind.
The cost of LMI depends on various factors, such as
- ✅ Loan amount
- ✅ Level of home equity
- ✅ Whether you are a first-time home buyer or an investor, and
- ✅ The risk associated with a particular loan package you are planning to buy
- ✅ The particular bank or lending institution
It’s important to understand that each case is different and dealt with differently, therefore speak to our team of experts about your personal financial situation.
Having the right person guiding you will help you save a lot of money on LMI and will allow you to make home loan repayments on a timely basis, making it possible for you to repay the loan in full.
How to Avoid LMI
There are a number of ways to avoid paying for LMI.
- ✅ Increase Amount of Deposit
- You can purchase a home without the paying lenders mortgage insurance. For that, you have to maintain a reasonable deposit. If you have a small deposit and your loan to value ratio is more than 80 per cent, the risk of loss for the lender increases. On the other hand, having a bigger deposit means the loan amount will be lower and hence, lower risk for a lender.
- You do not have to pay Lender’s Mortgage Insurance if you have a deposit worth 20% of the property value. Therefore, you need to decide whether the dream of buying a new home should be delayed while you save a little more money, or if you should buy a property sooner with the added cost of the mortgage.
- ✅ Find a Guarantor
- If you don’t have 20% of the loan, finding a guarantor can be a good option to avoid LMI costs. Your guarantor will ensure that they will cover a part of your loan in case you fail to make the loan payment.
- It can be the ‘bank of your parents’ that provides financing for your home with a loan or cash gift. The amount paid by a guarantor can also add up to your deposit and enable you to avoid the mortgage payment.
- ✅ Seek Professional Advice
- Last but not least, always seek professional advice. A mortgage express broker can assess your financial position. Your broker can also help you secure the right source of finance that is in line with your financial goals. Certain jobs and professions are eligible to have LMI Waived.
If you have a deposit of at least 20 per cent, you can avoid making this payment. Another way to avoid it is to find a guarantor. Having a guarantor on your home loan takes the risk away from the lender because if you default, the guarantor will have to compensate for that.
You can also avoid paying LMI by finding a person who does not charge LMI.
Although it may be hard to find a lender, there are some lenders who will allow you to borrow more than 80 per cent of the property value without charging lender’s mortgage insurance.
Read More: How to get no LMI and 90% LVR
Can I get an LMI Refund?
There are a number of banks that have changed their agreement with the LMI providers in order to help customers so that they can pay lower premiums. Unfortunately, the majority of these changes happened way back in 2012, so if you have gotten your loan since then you probably do not qualify for an LMI refund.
Is it possible to transfer an LMI Policy?
The answer is no. You cannot transfer your LMI policy to another bank. If, however, you stick with the same lender, you can get a discount on a new LMI premium. This can happen if you internally refinance your loan or increase the existing loan amount.
Buying your first home is not an easy job. In fact, it involves a lot of hard work, such as making inspection visits, going to auctions, and searching for the right property. On top of that, you have to bear the financial burden that comes along with it.
In the current environment with low-interest rate, it might take you years to save up to 20 per cent deposit, especially if you are buying a house for the first time. Therefore, make sure that you understand what LMI is and how you can avoid it.
We can tell you if LMI can be waived for your mortgage! Contact us today – Nathan Vecchio – 0410 000 689
Or call us on 1300 088 065 or fill out our online assessment form.
- Awesome! How to get no LMI and 90% LVR
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