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 but doesn’t not affect your interest rate.
LMI is only applicable if your home loan poses a high risk to the bank. This is generally because you are borrowing a high percentage of the value of your property, which, for standard situation, is anything above 80% of the purchase price.
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How much will you pay in LMI?
Example LMI rate tables & tips to reduce your premium.
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Why do I need to pay LMI?
As a general rule, you will need to pay LMI if you are borrowing more than 80% of the property value.
If you are self employed and applying for a low doc loan because you cannot prove your income, LMI will apply when borrowing more than 60% of the property value.
Mortgage 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 they are advanced.
For example, if you borrow $500,000 and the LMI premium is $5,000, then when your loan is advanced you’ll receive $495,000.
The only exception to this is if you’re able to “capitalise” or add the cost of the LMI premium on top of your mortgage. You won’t avoid LMI but you will avoid having to pay it upfront.
Your LMI premium is a once off fee so you don’t pay it every year like you do with LMI in some other countries or other types of insurance in Australia.
Don’t just compare the interest rate!
A lot of first time and even second and third-time borrowers do this without also considering the cost of LMI. The problem is that banks and lenders don’t actively publish the LMI premium rates of their mortgage insurer so it’s really difficult for the ordinary Australia to compare.
Luckily, the Lenders Mortgage Insurance calculator can be used to estimate the LMI premium that you would be liable to pay with a range of lenders and insurers.
The banks and LMI providers know that few people shop around for a better mortgage insurance premium. So here’s your opportunity to get the lowest premium possible!
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 save a larger deposit.
You can use the buy now or save more calculator to get a pretty good idea of 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, then it is usually better to buy now rather than trying to save a larger deposit.
Did you know that you can borrow up to 105% of the purchase price and pay no LMI if you use a guarantor mortgage that is supported by your parent’s property?
Discover if you qualify for a guarantor loan by contacting us on 1300 889 743 or enquiring online.
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 will 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). In this case, the loan amount is large and the LVR is high so the LMI premium would also be high ($38,00 to $45,000).
Remember though, LMI providers have different premium rates which means 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.
Please call us on 1300 889 743 or enquire online and one of our specialist brokers can find you a lender with competitive LMI rates.
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 the 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 conservative because of the high risk associated with loans where there is little or no deposit.
Mortgage insurers are also notorious for credit scoring applications. Many people meet the lending guidelines of their bank but get declined by their bank’s mortgage insurer due to failing their credit score.
Some lenders have a close relationship with their LMI provider 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 LMI 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
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.