What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) is a type of insurance that a home loan lender takes out, to insure themselves against the risk of a borrower not making their home loan repayments. The insurance covers the outstanding balance if the property is sold for less than the remaining loan balance. The LMI insurer may then come to you, the borrower, and require you to pay the shortfall directly to them and not the lender.
The catch is, the borrower, not the lender has to cover the insurance premium, which can run into the tens of thousands of dollars.
LMI is required when a borrower has a deposit of less than 20% and the loan-to-value ratio (LVR) of the loan is greater than 80%. For example, Doug is buying a house worth $500,000 and has a $50,000 deposit (plus costs). His loan would be $450,000 and the LVR would be 90%. Doug would then have to pay LMI of approximately $8,600 or an extra $163 per month (excluding stamp duty).
Example is indicative only, ensure you confirm the exact figures for your situation.
Lenders Mortgage Insurance (LMI) explained
LMI can be a great tool for lenders to use, which allows them to provide a loan to a person/s who would ordinarily be too “risky” to lend to. The LMI provides protection to the lender so that even if a borrower defaults or the loan can’t be repaid, they are going to get the money they loaned back.
It is important to understand that LMI doesn’t protect the borrower in the event that they can’t make mortgage repayments, it protects the lender. Unfortunately, if you are required to have LMI attached to your loan, you are the one who must pay the insurance premium even though the insurance doesn’t actually cover you.
This means if you do run into trouble with your repayments, you can’t make a claim on the LMI policy for yourself. All lenders have options available if you are experiencing financial hardship and are very happy to work with you on ensuring arrangements are made to provide you with support.
LMI is not mortgage protection or income protection insurance. If you require one of these products it’s best to speak with a financial planner who can assist you with these needs.
Why does a lender require LMI?
Because the loan is a higher risk of not being repaid if trouble strikes. When a loan is calculated at above 80% of the LVR, it doesn’t give the lender as much wiggle room if they need to quickly sell the property if a borrower defaults. As the housing market is subject to external pressures, at any given time the lender likes to ensure the loan will be repaid.
LMI is essentially a policy or tool that lets a lender take on a higher risk loan with a smaller deposit and higher LVR ensuring they aren’t out of pocket if the house can’t be sold to cover the loan.
Is LMI a bad thing?
LMI can be a very useful tool for borrowers to use if they don’t have a 20% deposit and want to get into the property market sooner. With the median house price in Melbourne now up over $800,000 it could take years to save your 20% deposit of $160,000 plus costs such as stamp duty and fees. Of course, the problem here is that while you are busy saving away, the cost of property goes up too, in fact property prices in Melbourne went up over % from 2020 to 2022.
By using LMI to protect their interests, some lenders will allow you to borrow up to 95% of the purchase price of your property, meaning you can get into your home much sooner. And the sooner you buy, the longer you are able to hold the property which means your asset will hopefully increase in value improving your overall financial position (and not running away from you while you scramble to keep saving).
It’s very important you understand the implications of not making payments on your loan, defaulting or having to sell the property to cover your debt. Even though there is LMI in place, you still have to cover an shortfall if the LMI insurer has to pay the lender. So before you dive in, make sure you understand what happens if you run into financial hardship.
When do you have to pay LMI?
LMI can be paid upfront when you settle your home loan or it can be paid monthly as part of your home loan repayments. LMI is non-refundable, which means even though you may take out a 30 year loan and repay it after just 10 years, you won’t receive any money back by way a premium refund.
See below for details on how LMI can be capitalised onto the loan.
How much is Lenders Mortgage Insurance?
LMI is calculated based on a couple of different factors including the value of the security i.e. the property you are buying and how much your deposit is, whether your deposit is genuine savings or a gift.
As premiums and guidelines are always changing, it’s best to speak directly to your broker or lender to discuss how much Lenders Mortgage Insurance may cost you.
How is LMI calculated?
LMI is calculated based on the loan amount and will vary depending on what the loan to value ratio (LVR) is. If you require LMI, it’s important to know that the amount of LMI will change if you increase the loan amount, or increase/decrease the LVR. Basically, the higher the loan amount and the more you are borrowing against the security, the more LMI you will have to pay.
There are only two Lenders Mortgage Insurers in Australia, QBE and Genworth. You can view the QBE LMI calculator here and the Genworth calculator here.
Not all lenders use both mortgage insurance providers, so depending on which lender you go with, the LMI may be calculated slightly differently.
How might LMI affect my home loan?
LMI will make your loan more expensive, if capitalised onto the loan the LMI is included in the principal and you pay interest on it for the life of the loan. Once you understand how much the LMI will likely cost, the lender will calculate the loan based on the amount you are borrowing, less your deposit, plus the LMI.
This could bring your loan up to quite a high LVR. The flow on effect meaning it could be more difficult to get the loan depending on on your income. The insurance company who provide the LMI cover will also assess your application on top of the lender who is offering the loan which means your application may take longer and you might be required to provide more paperwork and information about your income and spending habits.
It’s important to get the ball rolling early, we would suggest getting a pre-approval in place before you start house hunting. Then when you’re ready to make an offer, you can do so with confidence, knowing your budget and the likelihood of approval is higher.
Can LMI be capitalised onto the loan?
Yes, in most cases LMI can be capitalised onto the loan. This means instead of paying thousands of dollars upfront and out of pocket, the lender will add the LMI to your loan principal and you will pay this off over the loan term.
If you prefer to pay your LMI upfront you can do this too, however this is less common amongst first home buyers as most people prefer to put those funds towards increasing their deposit.
Do I pay stamp duty or GST or LMI cover?
Yes, unfortunately both stamp duty and GST are payable on LMI. The good news is that these are generally included in the quote you receive from the lender, so you won’t have to worry about finding more cash to cover these extra costs too.
How can I avoid paying LMI?
Having a 20% deposit will ensure you don’t need to pay LMI. This could mean taking longer to save your deposit, asking your family to gift you the funds if possible or looking properties in a lower price bracket.
Alternatively, lots of home buyers make use of a guarantor. This is someone, usually a parent or close family member, who provides additional security on the loan. This is often an investment property which is used as security and reduces the LVR to 80% allowing you to avoid paying LMI.
A guarantor means you can still borrow the same amount with the same (or a lesser) deposit and won’t be required to pay any LMI. Guarantors are required to get independent legal and financial advice before they commit to putting their property forward as security for your loan.
There are also a number of government schemes available such as the First Home Loan Deposit Scheme and First Home Super Saver Scheme, which provide options to first home buyers to purchase without having to pay LMI. Find out more here.
Is it better to wait and save a bigger deposit or pay LMI now?
This is a question you might be asking yourself and one that you’ll need to do your own risk assessment on. Entourage can help you look at both options, calculate what this is going to look in your circumstances and assist you in reaching a decision that’s going to best suit your current and future needs.
Waiting to save a bigger deposit can mean you need to borrow less, won’t pay any LMI and may mean you can secure more competitive interest rates. However, by waiting it may also mean the housing market increases beyond your current affordability. Throughout the pandemic, the median Melbourne house price increased by over 20%, some areas increased by as much as 50%. If you waited and didn’t purchase, chances are the deposit you need increased by the same amount, making it very difficult to save a 20% deposit.
LMI means you can own your home sooner, stop paying rent and start accruing equity. It also means you can buy with a smaller deposit if you don’t have access to a guarantor. Whilst it can be expensive, there are also a lot of benefits to utilising LMI too.
Can I keep the same LMI cover if I upgrade my home or refinance?
No, LMI is a non-refundable payment made for each loan. If you refinance and your LVR is greater than 80% then LMI will be payable again at the full amount calculated on the loan amount at the time of application.
You don’t receive a discount, refund or reimbursement when you refinance, pay out the loan or upgrade. If you want to avoid paying LMI then you need to ensure the loan amount when you refinance or upgrade is less than 80% of the LVR.
It used to be possible to top up your loan without paying LMI on the top up, however this too has changed in recent years and LMI will be calculated and charged on the topped up amount.
Some professions can avoid paying LMI altogether
In most instances, LMI becomes applicable on a home loan as soon as the LVR is above 80%. That said, there are some professions who can be approved for as much as 95% LVR without having to pay any LMI.
These applications are assessed on an individual basis, and professionals need to meet certain profession, membership and other criteria. Most common professions are:
- Medical professionals: doctors, dentists, veterinarians, optometrists, physiotherapists
- Legal professionals: Lawyers, solicitors and barristers
In addition to working in one of these professions, certain memberships with associations and certifications may also be required relevant to that profession.
Contact us to understand whether you may qualify for an exemption.
How can I apply for a loan with LMI?
We can help with that. Entourage has a team of expert mortgage brokers who are experienced in helping borrowers who need a loan with LMI. We can also provide some support with savings strategies if you would prefer to aim for a 20% deposit. Whether you are a first home buyer, upgrader, looking to refinance or purchase an investment property, the Entourage team can help with all your lending needs.
Make sure you have a chat with the team about your deposit and your estimated budget. Our team will then calculate your borrowing capacity, discuss what your repayments will look like (either with or without lenders mortgage insurance) and guide you through the process. Best of all, as we are paid a commission by the bank you choose to work with, our service to you is completely free!