Lenders Mortgage Insurance
Buying a property in Australia can sometimes involve significant costs. One of the larger costs is the initial deposit required by many lenders. Traditionally the deposit is 20% of the home price, but with Lenders Mortgage Insurance, prospective home buyers can put up a deposit of as low as 2 1/2 to 5%.
Lenders Mortgage Insurance (LMI) is an important consideration for borrowers seeking a home loan If they don’t have the requisite 20% of the purchase price. It’s a one-off premium payment that works for mortgage applicants with smaller deposit amounts, but it can have both benefits and drawbacks.
This guide is all about understanding Lenders Mortgage Insurance, including what it is, how it works, and how to decide if you need it or not.
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance is a lump sum, non-refundable insurance payment that is added to your mortgage as a guarantee for the lender. Lenders require LMI when a client is taking out a mortgage with less than 20% deposit – meaning they are borrowing more than 80% of the property value.
LMI protects the bank against any potential loss that could happen in case the borrower is unable to repay or defaults on the home loan. Because many home loan applicants aren’t able to place a huge deposit on the loan, which is when lenders’ mortgage insurance kicks in. It can be paid upfront or the lender incorporates it into the home loan borrowings. LMI is also non-refundable, which means if you switch loans, the insurance won’t be transferred to another lender unless a new lender uses the same insurer- and only then can be a case by case situation where special circumstances are met.
Lenders Mortgage Insurance vs. Mortgage Protection Insurance
Lenders mortgage insurance is not to be confused with mortgage protection insurance or income protection insurance. The latter insures you, the borrower, so you can still cover repayments in the event of unfortunate situations such as injury, illness, unemployment, or death. It is designed to protect the borrower’s financial well-being and help them continue paying their mortgage obligations.
Meanwhile, lenders mortgage insurance is meant to protect the lender if the home loan deposit is over the 80% value. The primary purpose of LMI is to reduce the risk for lenders when approving loans with higher loan-to-value ratios (LVRs). If a borrower defaults on their loan and the property is sold for less than the outstanding loan amount, the lender can make an insurance claim to recover the shortfall.
Do I need Lenders Mortgage Insurance?
Home loan applicants who are required to pay LMI won’t really have a choice in which insurers a lender can use. That’s because lenders arrange for the policy and are dependent on agreements they have with appropriate insurers.
LMI will cost differently, depending on the insurer’s calculations. Among the factors that will affect the cost is the size of the loan, deposit amount, loan type (fixed or variable?) borrower’s employment status, to name a few.
Despite the steep cost, lenders mortgage insurance is beneficial for those who may not have time to save for the 20% home loan deposit. Especially in today’s market where interest rates are much higher than in years past, property market prices rise faster than buyers’ capacity to save.
LMI is an important component of the entire Australian housing market as it reduces lender risk, while still enabling thousands of Australian home buyers to buy the property of their dreams.
Can I avoid paying LMI?
While lenders mortgage insurance is a frequent add-on of standard mortgages, some borrowers could aim to under certain circumstances. Here are a few strategies that can help you avoid paying LMI:
Save for a larger deposit – The most straightforward way to eliminate having to add LMI to the overall loan is to deposit a larger sum that reaches the 20% threshold of the property purchase price. Having a large deposit reduces the loan-to-value ratio (LVR) and potentially eliminates the need for LMI altogether.
Explore guarantor loans – If your savings aren’t sufficient for a large deposit, consider a guarantor loan. With a guarantor, such as a family member, their asset or property serves as security for lenders, who may then be willing to waive the LMI requirement. However, this option requires careful consideration because having a guarantor means having another person involved in the home loan. So is not for everyone and many lenders will require the guarantor to gain legal advice before committing to providing a guarantee.
Inquire for profession-specific loans – Certain professions are deemed “low-risk” borrowers because of the well paying and in-demand nature of the work. If you are in the medical, legal, mining, entertainment, or sports industry, you could be among home loan applicants exempt from LMI.
Seek government assistance programs – Depending on your location, there may be government programs designed to help first-time home buyers or low-income earners enter the property market. Different programs offer concessions, grants, or other forms of support that may waive or minimize the need to pay for LMI.
How much will the LMI cost?
Costs will differ depending on the lender, the loan amount, and the LMI provider. You may check out online calculators to get a rough estimate of what the LMI cost ballpark would be, or talk to mortgage specialists to find out more given your particulars. The figure can vary greatly depending on lending volumes and previous claims by banks-so not all are equal.
Take note that lenders mortgage insurance costs differ according to these factors:
- Whether your home is owner occupied or not – as it is less likely that you will default on the mortgage if it is your residence.
- If you are a PAYG employee or self-employed
- If you have savings
- Whether you are applying for the First Home Owner Guarantee or not
To get an idea of how much LMI premium is for your brand new home loan, or if it’s worth it to switch loans with a new LMI payment, feel free to consult with our mortgage professionals. We’ll do the necessary research for your specific mortgage application.
