What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance, or LMI for short, is insurance that protects the lender in the event that you default on your home loan. LMI is only applicable if your loan is a high risk to the bank, generally because you are borrowing a high percentage of the value of your property.

It is paid as a once off insurance premium or fee when your loan is advanced and does not affect your interest rate.

Why do banks get LMI?

Prior to 1965 lenders would only approve loans for up to 80% of the property value, which made it very difficult for first home buyers to get into the property market. Banks were reluctant to lend more than 80% because they were at risk that they would lose money if the loan was not repaid.

Lenders Mortgage Insurance allows banks to lend more than 80% of the property value because the insurer is taking on the risk of loss. This means that first home buyers or people with a smaller deposit can buy a home or investment property without the need for a 20% deposit.

When do I need LMI?

As a general rule you will need LMI if you are borrowing over 80% of the property value with a normal home loan or over 60% of the property value with a low doc loan. The insurance is arranged by your lender or bank during your loan approval process so you don’t have to worry about additional paperwork.

When do I pay LMI?

You will pay the Lenders Mortgage Insurance Premium when your loan is advanced. Normally if you borrow say $100,000 and the LMI Premium was $1,000 then the lender will just advance you $99,000 unless your premium is capitalised (see below).

Your LMI Premium is a once off fee, you do not pay it every year as is the case in some other countries.

Who is protected by LMI?

Mortgage Insurance does not protect you as the borrower, it only protects the lender. The insurance does not cover damage to the property being used as security for the loan which is usually covered under a building insurance policy. LMI should not be confused with Loan Protection Insurance which covers the borrower in the event that they are unable to repay their loan.

Does the insurer need to approve my loan?

Yes the mortgage insurer will also need to approve your loan application. The bank will arrange this as part of their approval process. Mortgage Insurers are notoriously conservative because of the high risk associated with loans with little or no deposit. As a result they require borrowers to have an stable employment history, a perfect credit history and in most cases a savings record.

Some lenders have a close relationship with their LMI provider and so have the ability to approve loans on behalf of their mortgage insurer. This is known as a Delegated Underwriting Authority (DUA) or Open Policy. The benefit of this to you as a borrower is that these lenders are often able to approve loans that would often be declined by their LMI providers!

How do they calculate the LMI Premium?

Lenders Mortgage Insurers calculate the premium using a LMI Rate Chart or Premium Table. Basically they charge a percentage of the loan amount based upon the size of your loan and the percentage of the property value that you are borrowing (This is known as the LVR).

So for example if you were borrowing $255,000 secured on a $300,000 property you would be borrowing 85% of the property value. This is known as 85% LVR. Because your loan size was small and the LVR was low the LMI premium charged would also be small.

Alternatively if you were borrowing $950,000 secured on a $1,000,000 property then you would be borrowing 95% of the property value (95% LVR). Because your loan size is large and the LVR is high the LMI premium would be very expensive.

Different LMI providers have different premium rates so there can be a difference of thousands of dollars between the cheapest and most expensive LMI companies. Enquire online and one of our mortgage brokers will help you work out how to get you the cheapest LMI premium.

Lenders Mortgage Insurance Calculator

We have created a Lenders Mortgage Insurance Calculator which you can use to estimate the LMI Premium you would pay with a range of lenders & insurers.

Can I choose which mortgage insurer my bank uses?

No, lenders have commercial agreements with just one or two insurers and cannot get any other insurers to approve your loan. You can however choose your lender and so effectively choose which mortgage insurer your loan is insured through. By knowing which lender uses which mortgage insurer uses you can reduce the cost of your LMI premium.

What is LMI Capitalisation?

LMI Capitalisation is the process by which the LMI premium is added onto your loan. For example if you borrowed $270,000 secured on a $300,000 property then your premium may be around $2,500. Normally this means that after your premium is paid you only receive $267,500 from your loan. With LMI capitalisation the lender will lend you an additional $2,500 making your final loan amount $272,500. Because of this you get to use $270,000 which is the amount you applied for.

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Here at the Home Loan Experts our mortgage brokers have extensive knowledge of the Lenders Mortgage Insurers and their guidelines used to assess loan applications. Please contact us to discuss your situation with a mortgage broker.