Lenders mortgage insurance (LMI) is a once-off premium that lenders charge borrowers who want to buy a property but don’t have a sufficient deposit (generally 20%), or refinance their mortgage but don’t have sufficient equity.
What is the purpose of LMI?
LMI protects lenders against the risk of not recovering the outstanding loan balance should you be unable to pay your mortgage and the property is sold for less than what is owed. This premium is usually required to be paid upfront, although some lenders allow you to capitalise the cost into your home loan, and pay it off as part of your repayments.
How much is LMI?
The LMI cost is based on your property’s value and loan amount. And as every lender has its own LMI policy, the cost will differ from lender to lender. It could also vary depending on whether you are a first-home buyer and whether you are an owner-occupier or investor.
While mortgages with loan-to-value (LVR) ratios of at least 80% (i.e. a deposit of 20%) will generally not require LMI, those with LVRs higher than 80% will likely require LMI.
How do you calculate LMI?
LMI is calculated based on the size of the deposit and the loan amount. The amount increases as the LVR and loan amount increases.
If you were an owner-occupier who wasn’t a first-home buyer and bought a $1 million property, you could expect to pay LMI of about:
- $44,000 with a loan amount of $950,000 (deposit 5%, LVR 95%).
- $25,000 with a loan amount of $900,000 (deposit 10%, LVR 90%).
- $12,000 with a loan amount of $850,000 (deposit 15%, LVR 85%).
Again, this varies depending on the lender you choose.
How to avoid LMI
LMI could be waived if you buy a property under the federal government’s Home Guarantee Scheme (HGS) or with a guarantor mortgage.
Some lenders also offer LMI exemptions – under certain conditions – to professionals with large and reliable incomes, such as medical, legal and accounting professionals.
Paying LMI can have a silver lining
Choosing to pay LMI in exchange for homeownership is not necessarily a bad idea.
That’s because you won’t need to spend as many years saving up for a 20% deposit and can, thus, buy sooner. Surprisingly, that could actually save you money in the long run if your LMI premium is lower than property prices might increase by if you entered the market later.
Also, you might be able to buy a more expensive property. For example, if you had a $200,000 deposit, you could buy a $1 million property with a 20% deposit and not pay LMI, or buy a $1.4 million property with a 14% deposit and pay LMI.
To find out what would be a suitable deposit for you and how much LMI you might have to pay if your LVR was above 80%, reach out to your Loan Market broker for personalised advice.
