Lenders Mortgage InsuranceWhat is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) safeguards the lender in case you default on your home loan.
It usually applies when your loan is considered high-risk for the lender, often when borrowing over 80% of the property’s purchase price.
However, there are ways to potentially avoid this expense.
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What is LMI?
Lenders Mortgage Insurance (LMI) protects the lender if you default on your home loan.
It generally applies when your loan is considered high-risk, typically when borrowing more than 80% of the property’s purchase price. However, there are ways to avoid this cost.
How Does LMI Work?
As a rule of thumb, LMI is required if you borrow over 80% of the property’s value. For self-employed borrowers using a low-doc loan due to limited income documentation, LMI is necessary for loans exceeding 60% of the property’s value. Your lender arranges the LMI during the loan approval process, so you won’t need to handle extra paperwork.
Call us at 1800 040 030 or enquire online for a free consultation to see if LMI can be waived for your mortgage!
When the loan is disbursed, the LMI premium is typically deducted from your loan amount. For example, if you borrow $500,000 and the LMI premium is $5,000, you’ll receive $495,000. Alternatively, you can “capitalise” the premium by adding it to your mortgage, spreading the cost over time. This approach avoids upfront payment but doesn’t eliminate the LMI cost.
The LMI premium is a one-time fee and doesn’t require annual renewal like other insurance types.
How LMI Helps Borrowers Buy a Home
LMI allows borrowers to purchase a home with a smaller deposit, lowering upfront costs and enabling quicker access to property ownership. This is particularly beneficial for first-time homebuyers and those with limited savings. However, it’s essential to understand the costs involved and explore options to potentially avoid this expense.
How Much Is LMI?
The cost of LMI can vary significantly depending on the loan amount and the percentage of the property value being borrowed. It often represents a substantial expense, making it essential to factor this into your overall budget when planning to purchase a home. Including LMI in your financial planning is crucial, as it can have a considerable impact on your finances.
Typical LMI Costs
| Loan Amount | LVR | LMI |
|---|---|---|
| $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 |
LMI Discounts for First-Home Buyers
One of our lenders is now offering appealing discounts on Lenders Mortgage Insurance (LMI) based on certain criteria, offering homebuyers more flexibility and potential savings.
- 15% Upfront Payment Discount: Pay the LMI premium upfront when purchasing an owner-occupier or investment property to receive a 15% discount.
- First-Home Buyer Discount: First-time homebuyers are eligible for an additional discount calculated based on the loan’s attributes.
- Combined Discounts: First-home buyers paying LMI upfront can enjoy an additional 15% discount after the First-Home Buyer Discount is applied.
Additional Details
These discounts apply to new property purchases, loan top-ups, and refinances. To take advantage of the upfront payment discount, ensure funds are with your conveyancer on settlement day. The upfront amount can be paid by the applicant, a family member, or another party.
What Does This Mean for You?
Typically, we add the LMI premium to the loan amount, avoiding upfront payments. For example:
- A $500,000 loan with $20,000 LMI becomes a $520,000 loan.
This approach is ideal for clients who prefer not to pay LMI upfront, though it increases the loan amount.
For those with sufficient funds to pay LMI separately upfront, the discounted rates can reduce costs significantly. This option is particularly useful for clients whose borrowing capacity might not cover the increased loan amount from adding LMI. However, this scenario applies to a smaller group of borrowers.
How can I avoid paying LMI?
Save A Larger Deposit
Saving a deposit of at least 20% of the property’s purchase price can help you avoid LMI. This reduces your loan size and shows lenders that you are a lower-risk borrower.
Have A Guarantor
Having a guarantor, typically a close family member, can provide additional security for your loan by using their property. This lowers the lender’s risk and may allow you to avoid LMI even with a smaller deposit.
Utilise Government Grants and Schemes
There are various government grants and schemes aimed at helping first-time homebuyers or those in certain situations boost their deposit. Taking advantage of these can help you reach the 20% deposit requirement faster, thus avoiding LMI. You can read more about these grants in our First Home Buyer Guide
Explore Professional LMI Waivers
Some professions, such as doctors or accountants, may qualify for LMI waivers with particular lenders due to their perceived lower risk. It’s worth checking if your profession is eligible for any LMI discounts or exemptions.
Commonly Asked Questions
Lenders Mortgage Insurance (LMI) does not offer protection to the borrower; it is designed solely to protect the lender. If you are unable to repay your loan and the lender does not recover the full amount, the lender can file a claim with the insurer.
This insurance does not cover any damage to the property used as collateral for the mortgage. Damage to your property is typically covered by your building insurance policy, or, if you own a strata title property, it will be covered by the strata’s building insurance.
LMI should not be confused with loan protection or mortgage protection insurance, which protects the borrower in cases where you cannot repay your loan.
When purchasing a property, it’s important to consider life, total and permanent disability (TPD), and income protection insurance to ensure you can continue to repay your loan and provide for your family if unforeseen events such as death, illness, job loss, or an accident occur.
Unfortunately, many Australians neglect to take out these types of insurance when buying a home, which leaves them unprepared for significant life events.
The leading mortgage insurers in Australia include:
- Genworth Financial: One of the largest Lenders Mortgage Insurance (LMI) providers in Australia, offering a variety of products and services to help lenders manage mortgage default risk.
- QBE Lenders’ Mortgage Insurance: A significant player in the LMI market, QBE provides comprehensive mortgage insurance solutions and partners with numerous lending institutions nationwide.
- Helia (formerly Genworth Mortgage Insurance Australia): Specialises in residential property mortgage insurance, delivering comprehensive coverage and services for both lenders and borrowers.
- Westpac Lenders Mortgage Insurance: Westpac’s in-house mortgage insurance arm, offering LMI services primarily to Westpac customers and affiliates.
- Commonwealth Bank Lenders Mortgage Insurance: Commonwealth Bank’s dedicated mortgage insurance division, providing tailored LMI solutions to its customer base.
- ANZ Lenders Mortgage Insurance: ANZ’s proprietary LMI provider, focused on minimising default risks and supporting homeownership for its customers.
These insurers play an essential role in the Australian mortgage lending sector, mitigating the risks associated with high loan-to-value ratios and supporting lenders in offering loans to homebuyers with smaller deposits.
Lenders Mortgage Insurance (LMI) premiums are determined using a rate chart or premium table that takes into account the loan amount, property value (to calculate the Loan-to-Value Ratio or LVR), and the insurer’s specific premium rate.
For example, if you’re borrowing $255,000 against a $300,000 property, this equates to an 85% LVR. Since both the loan size and LVR are relatively low, the LMI premium will be modest, typically ranging from $1,800 to $2,300.
In contrast, if you’re borrowing $950,000 on a $1,000,000 property, the LVR is 95%. With a higher loan amount and LVR, the LMI premium will be significantly higher, typically between $38,000 and $45,000.
Keep in mind that LMI providers use different premium rates, meaning there can be significant variations in costs between providers. This can result in substantial differences in the LMI premium you may pay.
Unfortunately, banks and lenders don’t typically disclose LMI premium rates, making it difficult for borrowers to compare and find the best deal.
To get the best possible LMI premium, reach out to us on 1800 040 030 or enquire online, and one of our mortgage brokers will assist you in finding the most affordable option and get you an estimate of the premium you may be liable to pay with various lenders and insurers.
Medical Professionals: Including doctors, dentists, optometrists, veterinarians, chiropractors, pharmacists, and similar roles.
Accounting and Finance Professionals: Such as accountants, CFOs, finance managers, auditors, actuaries, and related positions.
Legal Professionals: Covering lawyers, barristers, judges, solicitors, and other legal experts.
Engineering and IT Professionals: Comprising engineers, IT specialists, and similar professionals.
Nursing and Midwifery Professionals: Including registered nurses, enrolled nurses, midwives, and related roles.
When refinancing your home loan, you may be required to pay Lenders Mortgage Insurance (LMI) if the new loan’s loan-to-value ratio (LVR) exceeds 80% of the property’s value. This is common if your property’s value has decreased or if you’re refinancing with a high LVR. Even if you’ve already paid LMI on your original loan, if your new loan’s LVR remains above 80%, you may still need to pay LMI again. This is because LMI is specific to each loan and lender.
Although Lenders Mortgage Insurance (LMI) does not directly affect interest rates, having a high loan-to-value ratio (LVR) can result in higher interest costs. When your LVR exceeds 80%, lenders typically charge a slightly higher interest rate to offset the increased risk.