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.
If you are self employed and are applying for a low doc loan because you cannot prove your income then LMI will apply if you borrow over 60% of the property value.
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.
When do I pay LMI?
You will have the Lenders Mortgage Insurance (LMI) premium deducted from the loan funds when it is advanced. For example, If you borrow $500,000 and the LMI Premium is $5,000 then when your loan is advanced you receive $495,000 unless your LMI premium is capitalised (see LMI capitalisation).
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.
Lenders Mortgage Insurance Calculator
We have created a Lenders Mortgage Insurance Calculator which you can use to estimate the LMI Premium that 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 that you get the lowest premium available!
Should I buy now or save a larger deposit?
Saving a down payment for your home can take several years, which leaves many Australians wondering if it is better to buy now and pay a higher LMI premium or to save a larger deposit. You can use Genworth Financial’s buy now or save more calculator to find out which option is best for you.
As a general rule if property prices are rising in the area that you are in or if you are paying rent (i.e. not living with your parents) then it is usually better to buy now rather than to save a larger deposit.
Did you know that you can borrow 100% of the purchase price and pay no LMI if you use a guarantor mortgage that is supported by your parent’s property? You don’t necessarily need to save a deposit at all!
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 ($1,500 to $2,200).
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 ($38,00 to $45,000).
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. Call us on 1300 889 743 or enquire online and one of our mortgage brokers will help you to find the cheapest LMI premium.
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 mortgage 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, or even less. This made it very difficult for first home buyers to get into the property market. Banks were reluctant to lend more than 80% of the property value because they were at risk of losing money if the home loan was not repaid.
Lenders Mortgage Insurance (LMI) allows banks to lend more than 80% of the property value because the insurer is taking over 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.
Without LMI, 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. If you are unable to repay the loan and the lender does not recover all of their money then they can make a claim with the insurer.
This insurance does not cover you for damage to the property that is being used as security for the mortgage. Damage to your property is normally covered by your building insurance policy or if you have a strata title property then it will be covered by your strata’s building insurance policy.
LMI should not be confused with loan protection insurance or mortgage protection insurance, which covers you, the borrower, in the event that you are unable to repay your loan.
You should always consider your life, total and permanent disability (TPD) and income protection insurance needs when you buy a property to make sure that you are able to pay your loan and support your family in that event that you pass away, become sick, lose your job or have an accident. Unfortunately many Australians do not take out these policies when they buy a home and as a result they cannot cope with major life events.
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.
Mortgage insurers are also notorious for credit scoring applications. Many people meet the lending guidelines of their bank yet get declined by their bank’s mortgage insurer due to failing their credit score.
However 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 these lenders are often able to approve loans that would normally be declined by their LMI providers!
What is LMI capitalisation?
LMI capitalisation is the process by which the LMI premium is added on top of your loan. This is also known as capping the LMI premium or having capped LMI.
For example, if you borrowed $270,000 secured on a property valued at $300,000, then your premium may be around $2,500. Normally this means that after your premium is paid you will only receive $267,500 from your mortgage. With LMI capitalisation, the lender will lend you an additional $2,500, making your final loan amount $272,500. Because of this, you will get to use $270,000 which is the amount that you applied for.
By capping your LMI premium you will need a smaller deposit since you are not paying for the LMI premium from the money that you have saved.
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 that they use to assess loan applications. Please call us on 1300 889 743 or enquire online to discuss your situation with a mortgage broker.