Lenders Mortgage Insurance (LMI) is a type of insurance that a borrower pays but protects a lender in case the borrower defaults on their mortgage. As LMI can be a significant additional cost for borrowers, understanding how it works can help you save thousands on your home loan and purchase your property sooner.
So, what is lenders’ mortgage insurance? How does it work? Can you be exempted from paying LMI?
What is LMI in Australia?
LMI is a one-time premium designed to protect a lender from financial loss in case you fail to repay your home loan. While you, the borrower, shoulder the cost of the LMI, it does not protect you in any way.
When you apply for a home loan, banks and lenders usually require LMI if you deposit less than 20% of the property’s purchase price or have a loan to value ratio (LVR) of more than 80%. LVR is the amount of your loan expressed as a percentage of the property’s value.
For example, if Darren buys a property worth $500,000 and deposits $50,000 (10%), he then needs to borrow $450,000. This leaves him with a 90% LVR, so he may need to take out LMI. However, if he manages to deposit $125,000, which is 75% LVR, his lender can waive the LMI fee.
Since low deposit home loans are risky, lenders aren’t simply going to lend you the money based on goodwill. They need some sort of guarantee that they can recover if you default on your home loan. So, LMI reduces the risk that lenders take when lending more than 80% of a property’s purchase price.
How does lenders’ mortgage insurance work?
If you default on your mortgage, the lender usually recovers the loss by repossessing and reselling the property to cover the outstanding loan amount. However, if the property’s value falls, the lender can suffer a financial loss. This is where LMI comes into play – the insurance covers the shortfall.
Typically, LMI is non-transferable. If you decide to refinance your loan to another lender, you can’t refund the initial LMI you’ve paid. Based on your situation and lender, you may need to pay another LMI when you switch lenders. One way to avoid paying LMI when you refinance your loan is by making sure that your LVR does not go beyond 80%.
While LMI may be expensive, it helps you own your home sooner without worrying about saving a 20% deposit.
How much does LMI cost?
LMI isn’t one size fits all. The cost depends on several factors, some of which include:
- Your deposit
- Value of the property
- Type of loan (owner-occupier loan or investment loan)
- Employment status
- The lender and LMI provider
Generally speaking, the cost of the LMI can reach thousands of dollars. To know how much LMI you need to pay, you can use an LMI calculator, but it’s best to speak with your lender.
When is LMI necessary?
LMI is required when your LVR is above 80% to counter the risks of loaning larger amounts. In other words, you need to pay LMI when your deposit is less than 20% of the value of the property. Aside from that, there are other circumstances where your lender may require LMI.
Each lender may have a different LMI policy, so it’s worth checking the different criteria to help you weigh the option of paying it.
How can you avoid paying LMI?
LMI is expensive for some borrowers, but the good news is that there are ways you can save or be exempted from paying LMI:
Save a larger deposit
Since LMI is usually required for deposits lower than 20% of the property’s value, increasing your deposit to at least 20% can help you avoid paying LMI fees.
If you can’t reach the 20% deposit, you can either wait it out or get as close to 20% as possible to lower your LVR. Decreasing your LVR also lowers the cost of LMI you need to pay since the higher your loan amount is, the higher your LMI will be.
Check for government schemes
Another way to avoid paying LMI is to apply for government schemes that you may qualify for:
First Home Guarantee
The First Home Guarantee, previously known as the First Home Loan Deposit Scheme (FHLDS), allows eligible first home buyers to purchase a property with a minimum deposit of 5% without paying LMI.
From 1 July 2022 to 30 June 2023, a maximum of 35,000 guarantees are available each financial year. To qualify for the First Home Guarantee, you must be:
- An individual or a couple (married/de facto)
- An Australian citizen during the loan application
- At least 18 years old
- Earning up to $125,000 as an individual or $200,000 as a couple
- The owner-occupier of the purchased property
- A first-time buyer who hasn’t owned or had an interest in a property in Australia beforehand
While the minimum deposit under this guarantee is 5%, lenders may require more depending on your case, and maximum purchase prices apply.
Family Home Guarantee
Another scheme you can look into is the Family Home Guarantee. Under this scheme, eligible single parents can deposit as low as 2% without paying LMI. This is available to single parents that are either first-time buyers or previous homeowners with at least one dependent child.
From 1 July 2022 to 30 June 2023, there are 5,000 guarantees available, and it can be used for eligible residential properties, including an existing house, townhouse or apartment, a house and land package, land and a separate contract to build a home and an off-the-plan apartment or townhouse.
To qualify for this guarantee, you should:
- Be single (No spouse and/or a de facto partner. Note that being separated but not divorced is not considered single.)
- Have at least one dependent child
- Be the natural or adoptive parent of the child
- Not currently have a freehold interest in real property, a lease of land and a company title interest in land in Australia
Similar to the first home guarantee, lenders may require more than 2% based on your situation, and the property price caps apply.
As mentioned, banks and lenders differ in their LMI criteria, so browsing the market and comparing various lenders can help you find the one that caters to your circumstance the best. Moreover, some lenders offer discounts or waived LMI costs that can help you save on fees.
To make it easier, It’s Simple’s mortgage brokers can help you search for the right lender tailored to your situation.
Get a guarantor
While it’s risky, another option to get around paying LMI is by asking your family to be a guarantor. A guarantor is a direct or immediate family member (usually parents) who allows you to put up a portion of their property as security for your home loan.
Having a guarantor allows you to borrow more than 80% of the property’s purchase price without paying LMI.
Let’s say that you’ve saved a 15% deposit. Your guarantor can use the equity in their home to cover the remaining 5%. This way, you have a 20% deposit and don’t have to pay for LMI costs. However, the guarantor is responsible for the repayments in case you default on your home loan repayments.
What professions can avoid LMI?
Some banks and lenders consider specific professionals (such as doctors, accountants, lawyers and more) low-risk borrowers since they are highly paid and have relatively stable jobs. Because of this, some professions can borrow up to 90% without having to pay LMI.
How is LMI paid back?
LMI is a one-off premium that can either be paid upfront upon settlement or spread out and added to your loan repayments over the life of the loan. However, keep in mind that adding it to your mortgage also increases the overall interest you pay.
How much can you borrow with LMI?
Depending on the lender, you can borrow higher than 80% of the property’s purchase price provided that you pay the LMI premium. However, different lenders have different requirements, so it’s best to contact your lender to assess your borrowing power.
Does LMI get refunded?
Usually, LMI is non-refundable. So, even if you switch lenders, your lender may not refund the LMI you’ve paid off.
Does lenders’ mortgage insurance protect you?
LMI protects the lender and not you. It’s often confused with mortgage protection insurance, which protects borrowers and covers mortgage repayments in case of unexpected circumstances, such as unemployment.
Should you pay LMI?
Obviously, avoiding LMI saves you thousands of dollars. However, saving a 20% deposit can be challenging especially if property prices go up. If you’re planning to buy a home, understanding LMI and weighing between saving enough deposit or paying the premium can help you choose a better option that will save you more money in the future.
To prepare and control your finance, get in touch with our mortgage brokers to get expert help from the start and beyond. It’s Simple will help you break down your options, enjoy tailored choices from the top 40+ banks and lenders in Australia and help you choose and apply for the right loan solutions that satisfy your goals and needs.
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