When borrowing more than 80% of a property’s value, it is generally a condition of the loan that the borrower pays Lenders Mortgage Insurance (LMI).
What is Lenders Mortgage Insurance?
This type of insurance protects the lender – not the borrower – in the event that the borrower can’t meet the loan repayments and the net proceeds of an enforced sale of the property would not be enough to cover the loan.
While it may appear that there are no benefits to LMI for the borrower, the existence of LMI reduces the lender’s risk, which means that the lender can lend a larger amount or approve a home loan without the borrower having to provide the 20% deposit. Many people prefer to pay the LMI premium, rather than save for a few more years or pay higher interest rates.
Lenders Mortgage Insurance vs Mortgage Protection Insurance
Lenders Mortgage Insurance is often confused with Mortgage Protection Insurance. Mortgage Protection Insurance insures the borrowers and can cover mortgage repayments in the event of unanticipated circumstances such as unemployment, injury, illness or death.
Why is Lenders Mortgage Insurance (LMI) a good thing?
LMI means that even with a small deposit, you have the potential to own your home sooner. According to Mortgage Choice’s annual Future First Homebuyer Survey, 72% of prospective first home owners aim to purchase within two years of their decision to enter the market. While this is a fantastic goal, being able to save $80,000 (for a prospective $400,000 loan) can be a daunting task.
LMI allows the lender to have confidence in offering you a home loan, even if you haven’t quite reached that 20% deposit. With LMI in place, some lenders will allow you to borrow up to 95% of the purchase price of your home.
How much does LMI cost?
The cost of LMI can vary depending on the percentage of the property value borrowed and the loan amount. The premium can also vary depending on whether your contribution is made up of genuine savings or has come from other sources, such as a gift.
For these reasons, an accurate cost of LMI cannot be given until a property and lender have been selected, and could be a flat fee of up to thousands of dollars.
The LMI premium is a one-off, non-refundable fee which is paid at loan settlement. For most lenders, the LMI fee can be included in the loan amount. If the LMI is added into the home loan amount, the borrower will pay interest on the total loan and it will increase the minimum monthly loan repayments.
LMI is arranged by the lender, not the borrower, although the borrower pays for it. Each lender has their own policy regarding when LMI is required and how much it will cost. If a borrower refinances their loan, the premium is not transferable. If LMI is required on the new loan, a new premium must be paid.
How can I avoid paying LMI?
One method to avoid paying LMI is to save up the minimum deposit for the property purchase. Alternatively, if your deposit is less than 20% but you have a guarantor for the property loan, you may be able to avoid paying LMI. Your guarantor can assist by providing additional security which reduces the LVR to 80% and therefore enables you to avoid paying LMI.
Is it better to pay LMI or wait until I have a bigger deposit?
The answer to this question will vary depending on your individual circumstances and goals. We can discuss your options with you and help you run the calculations to reach an informed decision.
How is LMI calculated?
The percentage you’re required to pay increases as the LVR and loan amount increase, and usually goes up in stages.
Lenders Mortgage Insurance costs differ depending on the loan, lender and the LMI provider. The factors that determine the cost of your LMI can also include:
- Whether your property is owner occupied or not - it is believed that you are less likely to default on a loan if the property is also your residence.
- If you are self employed or paid as a PAYG employee.
- Whether or not you have genuine savings.
- Whether or not you are applying for the First Home Owner Grant (FHOG)
Lenders Mortgage Insurance exemptions
Even if your Loan to Value Ratio (LVR) is over 80%, your LMI could be waived if you meet some specific conditions. While these are rare and have strict qualifiers, if you are able to prove that you meet the conditions, you could have the opportunity to either receive a discount on your LMI or even have the LMI waived.
This is examined on a case-by-case basis, but some of the conditions could include:
- The LVR is only slightly over the 80% threshold
- No LMI payable for loans up to 90% LVR for certain professions
- Your lender has an internal LMI substitute
Professions that may be eligible to have LMI waived
For most applicants, the maximum LVR before LMI needs to be paid is 80%. However for certain professions, LMI may be waived for LVRs up to 90% and are assessed on an individual basis.
These professions include:
- Medical professionals: doctors, dentists, veterinarians, optometrists
- Lawyers, solicitors and barristers
(Note that you will also need to be a member of specific associations for your profession)