Lenders mortgage insurance
Generally speaking, if you want to borrow more than 80% of the value of a residential property, the lender will require mortgage insurance - also known as lenders mortgage insurance (LMI) - to be in place upon the settlement of the loan. The premium cost for this cover will be charged to you.
The basics
Before you decide whether you should pay for LMI now or wait and save up a bigger deposit, you need to understand what LMI is and how it works:
What is mortgage insurance?
LMI protects a lender against the risk of a borrower defaulting on their mortgage. In the event of a default a lender may be required to sell the property. If the property sells for less than the amount of the loan, the lender can make a claim against their LMI provider for the shortfall.
Who determines if you require mortgage insurance?
Your lender will make that determination based on your loan application and prepare the necessary paperwork.
Who qualifies for mortgage insurance?
LMI is available for most residential loans. Contact your local Mortgage Choice broker for more information on how LMI can help you enter the property market sooner.
How do you choose your LMI provider?
You don’t. Each lender will work with their LMI provider to determine whether you meet the underwriting guidelines to qualify for LMI.
Is mortgage insurance the same as mortgage protection insurance?
No. Don’t confuse the two. Mortgage protection insurance is taken out by the borrower to cover loan repayments in the event of death, sickness, unemployment or disability or other unexpected event that may negatively impact on the borrowers’ ability to make repayments. Note that the events covered need to be explicitly clarified by the insurer as they are quite strict in this regards and do not just cover any event.
What are the benefits of LMI?
LMI allows borrowers to enter the property market earlier with a smaller deposit. Without LMI, you will most likely have to save up to 20% of the property's value for a deposit in order to get a loan.
How much does LMI cost?
LMI is a once-off premium paid upon settlement of the loan. This covers the lender’s risk for the length of the loan. It is calculated based on a number of factors such as: deposit size, loan size, and the type of loan. GST is payable on all LMI premiums. Stamp duty is also payable, subject to state government regulations.
Capitalisation
Some lenders allow LMI premiums to be added to the loan amount and paid off as part of your monthly loan repayment rather than as a lump sum; this is known as capitalisation. However this means that interest is payable on the LMI premium, so you will end up paying more in the long run.
The following table provides the estimated cost of LMI premiums for a first homebuyer purchasing a home valued at $410,000 (the average median house price in Australia) with a loan term of up to 30 years and an interest rate based on the current average of the four major bank's standard variable interest rate of 7.80% p.a. plus a margin of 1.5%:
| Amount borrowed |
LMI premium (including GST, excluding stamp duty) |
Added to the monthly loan repayment (if premium capitalised) |
Total LMI cost at end of 30 year loan term of LMI if capitalised |
| 85% ($348,500) |
$3,485 |
$29 |
$10,440 |
| 90% ($369,000) |
$5,166 |
$43 |
$15,480 |
| 95% ($389,500) |
$10,672 |
$88 |
$31,680 |
Source: Genworth Financial
Buy now or save for later?
The reality is that most people want to get into the property market sooner rather than later. Borrowers will need to decide whether to pay for LMI now and get on the property ladder, or wait until they have saved a big enough deposit, to avoid LMI costs. Answering these questions should help guide an informed decision:
Does my lender allow LMI premiums to be capitalised?
Capitalising your LMI premium can be far more manageable than a once-off upfront lump sum. It can also free up money for other expenses related to the home purchase.
Will my savings rate catch up with property price growth rate?
Property prices are continually changing, which means by the time you could save up a 20% deposit, you may find that the properties that were within your price range initially have grown in value. In this scenario, you would now have to save even more to make up the 20% deposit. There is also the possibility that the growth in your property's price could in fact have exceeded the cost of LMI, so if you had paid for LMI and purchased the property earlier you would have been in a better overall financial position.
You need to calculate how long it will take to save up a 20% deposit, and find out the growth trend of the suburb you're looking to purchase in, then work out whether your rate of saving can catch up with the growth rate. It's also a good idea to take into account in your calculations the equity you may be able to build up in the property over the same period.
For example, if it takes you 2 years to save up 20% deposit on a $400,000 property (which is $80,000), you may find by the end of 2 years that the same property is worth $440,000 and you need to save an additional $8000 to make up 20%. Had you purchased the property sooner with the help of LMI, you would have built up at least $40,000 in equity even without active saving.
Of course, the reverse could be true in that the property price could go down in which case you would have been better off waiting to save up the required deposit - not only would you have avoided paying LMI, you'd have paid less for the property too. It's impossible to accurately predict the future, so a certain amount of risk is always at play.
Does my budget allow for extra LMI payments?
Consider carefully how much financial strain LMI will place on your finances now and in the future in addition to your loan repayments and other bills and financial commitments.
How important is it to me to buy a house now?
Do you need to get into the property market right now? Can you afford LMI upfront? Or can you wait until you are in a better financial positiion and thus avoid the cost of LMI?
Find out more about more about mortgage insurance by contacting your local Mortgage Choice broker.