Lenders Mortgage Insurance

What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance (LMI) is insurance that protects the lender in the event that you default on your home loan. It is paid as a once off insurance premium or fee when your loan is advanced and does not affect your interest rate.

LMI is only applicable if your loan poses a high risk to the bank. This is generally because you are borrowing a high percentage of the value of your property.

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 any additional paperwork.

In most cases your bank will use one insurer and you will not be entitled to decide who they use, even though there may be an insurer offering a different premium.

When do I pay LMI?

You will pay the Lenders Mortgage Insurance (LMI) premium when your loan is advanced. For example, If you borrow $100,000 and the LMI Premium is $1,000, the lender will normally 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 for LMI in some other countries or other types of insurance in Australia.

How do banks calculate the LMI Premium?

Lenders Mortgage Insurers calculate the premium using a LMI Rate Chart or Premium Table. They generally charge a percentage of the loan amount and a percentage of the property value that you are borrowing (the LVR).

For example, if you are 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 is small and the LVR is low, the LMI premium would also be small.

Alternatively, if you are 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 amount is large and the LVR is high, the LMI premium would also be high.

However, different LMI providers have different premium rates. This means that there can be thousands of dollars in difference, between the cheapest and most expensive LMI providers. Enquire online and one of our mortgage brokers will help get you the cheapest LMI premium around.

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. Don’t just compare the interest rate! The banks and LMI providers know that few people shop around for a better mortgage insurance premium. Make sure you get the best premium available!

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. However, you can choose your lender and thereby choose which mortgage insurer your loan is insured through. This way you can reduce the cost of your LMI premium.

The great news is that lenders with lower LMI premiums also tend to have better interest rates as well!

Why do banks need 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 (LMI) 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. Mortgage insurance allows us to achieve the dream of home ownership, without having to save a large deposit.

Without it, most people would not be able to afford the required deposit and therefore, would not be able to purchase a property.

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 that is being used as security for the loan. This is usually covered by a building insurance policy. LMI should not be confused with Loan Protection Insurance or Mortgage 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, where there is little or no deposit. As a result they require borrowers to have a 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. This means that lenders are often able to approve loans that may be declined by their LMI providers!

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.

Apply for a home loan

Here at the Home Loan Experts our mortgage brokers have in-depth knowledge about Lenders Mortgage Insurers and the guidelines they use to assess loan applications. Please enquire online to discuss your situation with a mortgage broker.