Why do banks charge LMI?

Lenders Mortgage Insurance (LMI) creates a safety net for the lenders in case you cannot repay your loan and the lender makes a loss.

This insurance allows banks to approve loans which in the past would have been declined due to being considered too risky!

Unfortunately, they pass the bill for the LMI premium on to you, the borrower, as a once off payment when your loan is advanced.

In most cases, the premium can be “capitalised” or added on top of the amount that you are borrowing.

What is a "safe" loan for the banks?

Low doc loans without LMI are considered safe if you are borrowing less than 60% LVR (meaning 60% of the property value).

If you are borrowing between 60% and 80% LVR then it is considered to be unsafe or high risk for the lender. In this case the lender will obtain mortgage insurance and ask you to pay a premium.

Borrowing more than 80% LVR for a low doc loan is considered to be extremely risky and is only available from specialist lenders.

Avoid LMI by borrowing less than 60% LVR

If you reduce your loan size then most lenders will not charge you an LMI premium. This is very simple, however not everybody has the funds to reduce their loan size.

Provide limited income evidence

Some of our lenders can accept alternative forms of income evidence which you may be able to provide. For example we can accept:

  • Interim financial statements and BAS for the last 12 months for a loan of up to 70% LVR.
  • Two year old tax returns for a loan up to 95% LVR.
  • An old tax return and BAS for a loan of up to 90% LVR.

LMI or risk fee?

Some lenders effectively self-insure their loans by charging a risk fee instead of obtaining LMI. This means there is no external mortgage insurer, however you still have to pay them a fee similar to LMI anyway.

Not all low doc loans have the same LMI premium rates. The same can be said for risk fees which can vary wildly between lenders and go by a variety of names.

You should contact a good mortgage broker to find out which one (whether LMI or a risk fee) is cheaper for your low doc home loan.

Get the lender to pay your LMI for you!

The LMI premium does not always come as a once off fee after your loan is settled. Some lenders will pay the fee for you and in turn, increase your rate to compensate. What you should do is calculate the length of period for your loan and then work out whether it is cheaper to have a higher rate or a once off fee.

Many borrowers prefer to have a higher rate so that they do not have to pay the extra fee when buying a property which would reduce the amount that they have as a deposit.

Three tips when applying for a loan with no LMI

Check for discounts

Some lenders offer special promotions from time to time where they will pay your LMI premium. Currently, one of our lenders is promoting an offer where they will pay the borrower’s LMI premium if the LVR is at or below 70%.

Carefully choose your loan amount

Lenders calculate the LMI premium in percentile brackets. This means that the rate used to calculate the premium will be different from percentage to percentage.

For example, having a LVR of 70% as opposed to 70.01% can easily reduce premium by several thousand dollars depending upon your loan amount.

By choosing the right lender and loan amount you can potentially save a substantial amount off your LMI premium.

Consider other options

Since the introduction of the NCCP Act, many lenders have introduced what is called a ‘Lite Doc’ home loan. The Lite Doc Home Loans are a cross between Full Doc Home Loans and Low Doc Home Loans.

A major difference is that they often require more income verification than Low Doc Loans but do not require as much evidence as Full Doc Loans. They are priced as full doc loans with no LMI if you borrow less than 80% LVR.

Apply for a low doc loan with no LMI today!

Our mortgage brokers know which Lenders Mortgage Insurers are the cheapest. Some lenders offer special LMI in an attempt to gain additional market share. Most often these LMI specials are not advertised to the public.

Enquire online or call us on 1300 889 743 to discuss your situation with one of our mortgage brokers.

  • CWalsh

    How much is the stamp duty on the LMI premium in NSW?

  • Hi CWalsh, the stamp duty on the LMI premium in NSW is 9.0% of the premium. Please note that this is not the same as the stamp duty charged on the purchase of a property.

  • lipps

    I’m thinking of going 60-70% on a low doc investment loan. What do most lenders look for when it comes to a loan such as this?

  • Typically, lenders will like to see that you’ve been in your current business for two years, although there are some that can consider less. You should be good with most lenders as long as you have no plans of going over 80% LVR. Most low doc lenders may also want to see a clean credit file and a perfect repayment history on your current debts.

  • Herrod

    Hi, do you have a calculator or a resource of some sort that I can use myself to find out if I can qualify for a low doc loan?

  • Hello Herrod.

    Yes, you can try out the low doc loan calculator, which is designed to assess your situation and identify whether or not you’re eligible for a low doc loan. We can then work out which lenders you qualify with, or which aspects of your situation may be of concern to a lender. Here’s the link to the calculator:

  • Langley

    Please explain to me why I should go with a home loan expert than go alone. Just need some convincing.

  • Hi Langley.
    A home loan application is more complicated than you may think and getting approved can be tricky so it’s best to have an experienced specialist working with you. Check out about the most common reasons why loan applications are declined by the banks and how we can help here:

  • Molnar

    Was thinking of going low doc but seems I can go full doc if I just wait a while. Now I’d like to know if it’s possible to get a no LMI 85% investment loan.

  • Hi Molnar,
    It’s extremely rare and there’s likely only one bank that can allows you to take out an 85% investment loan with no deposit, with the guarantor option being the most readily accepted no deposit solution. If you don’t have a 15% deposit but you still want to take out an 85% LVR investment loan, you may be able to do so using some non-bank lenders.