Lenders Mortgage Insurance or LMI is an insurance you have to pay if you are buying a house and do not have a deposit of 20%. It’s essentially a risk fee, but a fee you pay on behalf of the bank.
The thing about LMI is that is doesn’t actually protect you (or your guarantor), it protects the lender. If for whatever reason you default on your mortgage and the bank can’t get all of their money back by selling your property, then they can claim on the LMI policy to recover any shortfall.
If you have a loan of $500,000 that you default on and the lender is only able to sell the house for $450,000 then they may claim that $50,000 shortfall on LMI. Unfortunately the LMI provider may then attempt to recover that $50,000 from you, so LMI in no way protects you.
LMI is different to mortgage protection. Mortgage protection is a policy you can take out to cover your mortgage repayments should you become ill, unable to work, suffer a disability, unemployment or even death.
Why would I want to take out LMI then?
For most lenders, if you don’t have a deposit of at least 20% then they will require you to have LMI. Evidence shows that borrowers who don’t have a 20% deposit are more likely to default on their loans. By having LMI the lender reduces their risk of exposure or shortfall in the event that you default.
How is LMI calculated?
Each lender calculates it differently however the following variables can impact how much LMI is payable:
- How much you are borrowing. The higher the borrowing the higher the LMI premium will be.
- How much you have saved for your deposit. Not only will a higher lend mean you have a higher interest rate, it’ll also have an impact on the LMI you have to pay. For example someone with a 10% deposit will usually pay less LMI than someone with just a 5% deposit.
- QBE or Genworth? There are two major LMI insurers in Australia and the insurer the lender uses can impact the premium as the different insurers offer different rates.
- Self-employed, full time employee or part-time. Your employment status and hours worked can affect the premium, as can your occupation.
- Owner occupied property or investment purposes. If you are planning on living in the house, then chances are you will likely pay a different premium to an investor in the same circumstances.
Do I have to pay LMI upfront?
You can if you choose to, but most people opt to capitalise LMI into their loan. This means the lender adds the LMI cost into your home loan and you pay it off over the life of the loan. How much LMI you pay will vary from lender to lender, the below is indicative only using the Genworth Calculator.
For example, if you buy a home worth $500,000 and you only have a deposit of $50,000, as a first home buyer you would be required to pay an LMI premium of $8,640 which works out to be an extra $43.52 per month over 30 years.
If your first home is around the $1M mark, with a 10% deposit your LMI would be around $22,000 or an extra $111.07 per month over 30 years.
How can I avoid paying LMI?
If you are able to save a deposit of at least 20% then you won’t have to pay LMI. Alternatively if you have a family member who is prepared to be a guarantor, then you can utilise their generous contribution and avoid having to pay LMI or save the full 20% deposit.
Some professions are exempt from having to save a 20% deposit. For example lawyers, accountants, medical professional and some mining professionals are able to borrow up to 90% before they are required to pay LMI.
If you’re a qualified professional earning $150k per year in one of these fields make sure you enquire about LMI discounts that are available to you.
Many lenders also offer a discounted LMI premium for first home buyers, so whilst you do pay LMI you may find it’s less than what someone who’s not a first home buyers will be paying.
Is the premium refundable if pay off my loan?
In some instances, a partial refund may be available if you are able to pay out the loan within the first two years. This will depend on the lender and the LMI provider and is on case by case basis.
Not sure whether you should keep saving that deposit or dive in the deep end now? Chat with one of our Entourage advisors who can give you expert advice and guidance on next steps, simply contact us here.
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