Lenders Mortgage Insurance (LMI) is a one-off premium that protects the lender if you default on your home loan and there is a shortfall debt. It does not protect you, the borrower. You generally pay LMI when borrowing more than 80% of a property’s value.
In this article, we are going to cover what LMI is, how it works, how LMI premiums are calculated and proven strategies you can use to avoid LMI altogether. So, let’s get started.
What Is Lenders Mortgage Insurance (LMI)?
LMI is an insurance policy your bank arranges to reduce their financial risk when lending to borrowers with a small deposit. It allows you to buy a home sooner, but it strictly protects the lender.
For example, it should never be confused with Mortgage Protection Insurance, which is a separate policy that covers your repayments if you lose your job, fall ill, or pass away.
Key Factors That Affect Your LMI Premium
LMI costs vary significantly between lenders and depend on three primary factors:
Loan Size: Larger loan amounts inherently carry higher risk, increasing the premium.
Loan-to-Value Ratio (LVR): This is the percentage of the property value you are borrowing. An LVR over 80% triggers the LMI requirement.
Loan Purpose: LMI premiums are generally higher for an investment property than they are for an owner-occupied property.
Estimated LMI Costs
The cost of Lenders Mortgage Insurance represents a large upfront expense that must be factored into your budget. According to recent insurer data, your premium scales rapidly as your LVR increases.
Here is a general estimate of LMI costs based on loan amount and LVR:
| Loan Amount | Loan-to-Value Ratio (LVR) | Estimated LMI Premium |
|---|---|---|
| $500,000 | 85% | $5,000 - $5,600 |
| $500,000 | 90% | $11,000 - $13,000 |
| $500,000 | 95% | $13,000 - $15,000 |
| $1,000,000 | 85% | $11,000 - $14,000 |
| $1,000,000 | 90% | $30,000 - $35,000 |
| $1,000,000 | 95% | $33,000 - $40,000 |
Note: Insurers have different premium rate charts. Our mortgage brokers can use an LMI calculator to find the cheapest premium for your situation.
How Is The LMI Premium Paid?
The LMI premium is a one-time fee arranged by your bank during the loan approval process. You can either pay this amount upfront with your own cash on settlement day, or add it to your total loan balance (capitalising).
Paying Upfront vs. Capitalising LMI
Paying Upfront: You use your own savings to pay the premium to your conveyancer on settlement day. This keeps your total mortgage size smaller and avoids long-term interest charges.
Capitalising LMI: You add the premium to your total loan amount. While this spares you from paying cash upfront, capitalisation means you are paying compound interest on the premium over the 30-year life of the loan.
15% LMI Discount For First-Home Buyers
15% Off LMI First-time home buyers who choose to pay their LMI premium upfront on an owner-occupier or investment property are eligible for a massive 15% discount on their LMI costs. None of the top 10 competing banks offer this specific discount; it is unique to our broker network.
How To Avoid Paying LMI?
You can avoid paying Lenders Mortgage Insurance by saving a larger deposit, using a family guarantor, applying for government schemes, or qualifying for a professional LMI waiver. These strategies lower your LVR and bypass the extra fee.
Save A 20% Deposit (80% LVR)
By saving at least 20% of the property’s purchase price, your Loan-to-Value Ratio (LVR) remains at 80% or below. This classifies you as a low-risk borrower, completely eliminating the need for LMI.
Use a Guarantor Home Loan
A close family member (guarantor) can use the equity in their own property as additional security for your mortgage. This reduces the bank’s overall risk and allows you to bypass the LMI requirement, even if you have zero deposit.
First Home Guarantee (FHBG) And Government Schemes
Instead of waiting years to save 20%, you can use government schemes.
The Home Guarantee Scheme (HGS), which includes the First Home Guarantee (FHBG) and the Family Home Guarantee, allows eligible buyers to purchase a home with a 2% to 5% deposit without paying LMI.
LMI Waivers For Professionals
Certain high-income, low-risk professions qualify for LMI waivers up to 90% LVR with specific lenders. Eligible professionals frequently include:
- Doctors, dentists, optometrists, veterinarians, and pharmacists.
- Accountants, CFOs, actuaries, and auditors.
- Lawyers, judges, solicitors, and barristers.
Is LMI Transferable or Refundable While Refinancing?
No, LMI is strictly non-transferable between lenders and is generally non-refundable. If you refinance to a new lender and your LVR is still above 80%, you will have to pay a brand new LMI premium.
In contrast, partial refunds are only issued in very rare cases where the original loan is paid out exceptionally early in its term, depending heavily on the specific mortgage insurer’s policy.
Ready To Save LMI?
Your LVR is an important consideration for lenders. Fortunately for you, our expert mortgage brokers have in-depth knowledge of LMI guidelines.
Our expert mortgage brokers have in-depth knowledge of LMI guidelines. Call us on 1300 889 743 or enquire online today for a free assessment!
Frequently Asked Questions
Is LMI Tax-Deductible?
Generally, LMI is not tax-deductible for owner-occupiers. However, for an investment property, LMI is tax-deductible. Property investors can usually amortise the cost over 5 years or the life of the loan, depending on their financial setup.
Is Lenders Mortgage Insurance Part Of The Deposit?
Do I Pay LMI If My Property Increases In Value?
Who Are The Main Mortgage Insurers In Australia?
Which Professions Are Eligible For An LMI Waiver?
Do You Have To Pay LMI When You Refinance?
Does LMI Affect Interest Rates?
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