What is Lenders Mortgage Insurance?
Buying a property without a large deposit could see you having to pay an upfront fee called Lenders Mortgage Insurance (LMI).
When you’re new to real estate, it can be difficult to wrap your head around what deposits and home loans would mean when paying for lenders mortgage insurance. In this guide, we give you a quick overview of lenders mortgage insurance, from what it is to how it impacts your loan cost.
What is lenders mortgage insurance (LMI)?
Lenders mortgage insurance, also known as LMI, is a type of insurance that protects lenders in case a borrower fails to make repayments on their home loan. Borrowers are often required to pay for LMI if they have a loan-to-value ratio of over 80% meaning they're borrowing more than 80% of the property’s value.
By having LMI, you can borrow more from the lender and still have a good chance for mortgage approval. At loans.com.au, for example, borrowers can borrow up to 90% of the property’s value as long as they take out LMI and meet other application requirements.
Take note, lenders mortgage insurance is not the same as mortgage protection insurance. Mortgage protection insurance covers mortgage repayments in case of unemployment, disability, sickness or death, and this type of insurance is arranged between the borrower and an insurance provider - the lender is not included in this insurance coverage.
How much does lenders mortgage insurance cost?
LMI costs vary depending on the loan amount, the lender, and the LMI provider. It can be as little as $1,000 to upwards of $10,000 or $20,000 based on the cost of the house, the size of the deposit, and the length of the mortgage. Usually, the more you borrow from the lender, the higher your mortgage insurance will cost.
Other factors determining the cost of LMI include the amount of 'genuine savings' and employment status. Some government schemes, like the First Home Guarantee, can help alleviate LMI costs.
Here’s a quick estimate of what your possible LMI could look like based on property value and loan-to-value ratio:
| Estimated Lender's Mortgage Insurance (LMI) Premiums | ||
|---|---|---|
| Property Value | 90% LVR | 85% LVR |
| $200,000 | $2,684 | $1,299 |
| $400,000 | $6,944 | $3,390 |
| $600,000 | $10,800 | $5,100 |
| $800,000 | $14,400 | $6,800 |
| $1,000,000 | $22,392 | $11,135 |
The estimates above were made using the loans.com.au LMI calculator. You can use this online tool to calculate your potential LMI to help you determine your mortgage's total cost.
Now you may be wondering how to pay for lenders mortgage insurance. In many cases, LMI is a premium one-off lump sum payment made during loan settlement. If you don’t want to pay your LMI upfront, you may be able to include it in your total loan amount and spread it over the life of the loan. However, doing so would increase the overall cost of your repayments.
How can I avoid paying lenders mortgage insurance?
The simplest way to avoid paying mortgage insurance is by saving up a deposit of at least 20% of your ideal property’s value. This not only exempts you from paying LMI but also increases your chances of loan approval, saves you on interest fees, and lowers the overall cost of your loan. Saving for a 20% deposit could take longer but it offers plenty of great benefits.
If you’re unable to save a 20% deposit, you could also try the following methods:
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Lender’s Risk Fee: A Lender's Risk Fee (LRF) is a fee that may be charged by a lender instead of an LMI. It will be charged when LRF is lower than the LMI premium. It is a non-refundable fee. Note that only some lenders offer this alternative.
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Family guarantee: This means letting a family member act as a guarantor to secure your deposit. They could help reduce your LVR to under 80%, which would save you from paying an LMI. This also has the added advantage of increasing your borrowing power.
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Apply for government incentives. Programs like the First Home Guarantee allow first-time home buyers to purchase a property with only a 5% deposit courtesy of the Federal Government. Eligibility for the scheme depends on where you are buying, your income, and the value of the property.
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Substitution of security: A substitution of security can help swap the security on your current loan to the home you intend to purchase. This only applies to people looking to buy a new property and sell an existing one at the same time.
As you can see, there are a few ways you can avoid paying LMI. If you want to buy a home but don’t have enough for a 20% deposit, it’s best to consider all your options before applying for a loan.
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About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
