Lender’s Mortgage Insurance (LMI) is a premium some borrowers must pay when their deposit or equity is less than 20% of the property’s value. This occurs when the loan value ratio (LVR) exceeds 80%.
What is Lender’s Mortgage Insurance (LMI) and can you avoid it?
Lender’s Mortgage Insurance (LMI) is a premium some borrowers must pay when their deposit or equity is less than 20% of the property’s value. This occurs when the loan-to-value ratio (LVR) exceeds 80%.
Since these loans pose a higher risk to the lender, the cost of lender’s mortgage insurance is passed on to the borrower as a non-refundable fee.
Lender’s Mortgage Insurance protects the lender in case the borrower defaults on the loan and the lender cannot recover the full loan amount after selling the property at a loss.
If you have a deposit of at least 20% (or equivalent equity), you won’t need to pay lender’s mortgage insurance, as your Loan Value Ratio will be below 80%, which is considered a lower risk for the lender. The lower your Loan Value Ratio, the less risk the lender assumes.
It’s important to note that Lender’s Mortgage Insurance only protects the lender, not the borrower or any guarantor, even though you are the one responsible for paying it.
How and When Do You Pay Lender’s Mortgage Insurance?
You can pay Lenders Mortgage Insurance upfront in a lump sum at settlement, but the more common choice is to add it to your loan amount (a process called capitalisation). The lender will arrange this for you, but remember that it will increase your overall loan amount and, consequently, the interest you’ll need to pay.
How Do Lenders Calculate Lender’s Mortgage Insurance?
Most lenders calculate Lenders Mortgage Insurance on a tiered scale, with your LVR being a major factor. They also consider:
- The value of your property (according to the lender’s assessment)
- Your deposit or equity as a percentage of the property value
- The total loan amount you’re borrowing
- The type of loan (e.g., owner-occupier or investor)
- The type of property you’re purchasing (e.g., established home or vacant land)
Generally, the higher your Loan Value Ratio, the more you’ll pay for Lender’s Mortgage Insurance. Lenders Mortgage Insurance is often higher for investment loans compared to owner-occupier loans. Since Lender’s Mortgage insurance calculations vary between lenders, it’s best to get an estimate directly from your lender.
How Much Does Lender’s Mortgage Insurance Cost?
According to Money.com.au, LMI typically ranges from 1% to 5% of your total loan amount, depending on your LVR. If your deposit exceeds 20%, you won’t need to pay any LMI. Here’s a breakdown of estimated LMI costs for various property values and deposit percentages:
| Property Value | 20% Deposit (80% LVR) | 15% Deposit (85% LVR) | 10% Deposit (90% LVR) | 5% Deposit (95% LVR) |
|---|---|---|---|---|
| $500,000 | $0 | $6,266 | $14,184 | $17,028 |
| $600,000 | $0 | $12,850 | $22,835 | $26,305 |
| $700,000 | $0 | $17,350 | $26,740 | $30,797 |
| $800,000 | $0 | $21,850 | $31,900 | $35,554 |
| $900,000 | $0 | $26,350 | $36,060 | $40,080 |
| $1,000,000 | $0 | $30,850 | $40,135 | $44,607 |
Note: These estimates are based on Westpac’s calculator for a property in Queensland. Each lender’s LMI calculation may differ.
Should You Pay Lender’s Mortgage Insurance Upfront or Add It to Your Loan?
Paying Lender’s Mortgage Insurance upfront is the most cost-effective option, but many borrowers choose to add it to their home loan to spread the cost over time.
However, adding Lenders Mortgage Insurance to your loan means you’ll pay interest on the Lenders Mortgage Insurance amount as well as your home loan. To mitigate interest costs, you can use an offset account linked to your loan, where you can deposit your savings and salary to reduce the interest payable.
Can You Avoid Lender’s Mortgage Insurance?
There are multiple ways in which you can avoid lenders mortgage insurance. Here are ways in which you can do so
- First Buyers Guarantee Scheme
This is a federal scheme for first home buyers that allows you to place a 5% and the scheme will stand guarantor for the remaining 15% allowing you to avoid lenders mortgage insurance as well as getting favourable interest rates. In other words you are treated as if you have a 20% deposit by the banks.
2. Use a lender that allows Lenders Mortgage Insurance waivers
There are certain professions and certain lenders that allow LMI waivers for people in these professions. Solicitors and legal professionals, accountants and auditors, professional athletes, dentists, health professionals & chiropractors are among the list of people who are available.
3. Using a lender that allows a higher LVR without Lenders Mortgage Insurance: There are lenders who can go to an LVR of 85% without the need for lenders mortgage insurance, please reach out to us and we can go through these options with you.
FAQs
1. What is Lender’s Mortgage Insurance (LMI)?
Lender’s Mortgage Insurance (LMI) is a type of insurance premium that protects the lender if a borrower defaults on their home loan. Borrowers need to pay LMI when their deposit is less than 20% of the property’s value.
2. When do I have to pay Lender’s Mortgage Insurance?
You will need to pay LMI if your deposit is less than 20% of the property’s value, meaning your loan-to-value ratio (LVR) is higher than 80%.
3. How is LMI calculated?
LMI is calculated based on a tiered scale that considers your LVR, the value of the property, the amount you borrow, and the type of loan. Higher LVRs typically result in higher LMI premiums.
4. Can I avoid paying Lender’s Mortgage Insurance?
Yes, you can avoid paying LMI by providing a deposit of 20% or more, which keeps your loan-to-value ratio below 80%.
5. Can I add LMI to my home loan?
Yes, many borrowers choose to add LMI to their loan amount, which allows them to spread the cost over the life of the loan, though this increases the interest payable.
6. Does LMI protect me as a borrower?
No, LMI only protects the lender if you default on your loan. It does not provide any protection to you as the borrower or any guarantor.
7. How much does LMI cost?
The cost of LMI varies depending on your LVR and the lender’s calculation. It can range from 1% to 5% of the loan amount. LMI is higher for borrowers with smaller deposits or for investment loans.
8. Is it better to pay LMI upfront or add it to the loan?
Paying LMI upfront avoids additional interest costs, but many borrowers add it to their loan to spread the payments over time. The choice depends on your financial situation.
9. Does every lender charge the same LMI?
No, different lenders calculate LMI costs differently. It’s recommended to get an LMI estimate from your specific lender.
10. What is the loan-to-value ratio (LVR)?
The loan-to-value ratio (LVR) is the amount of your loan compared to the value of the property. If your LVR is over 80%, you may need to pay LMI.
