Achieving the Great Australian Dream can often come with financial challenges, especially for first-time buyers who may not have saved up a large deposit. This is where Lenders Mortgage Insurance (LMI) comes in — if you are struggling to meet the typical deposit requirements of lenders, this might be able to help you enter the market sooner.

But what exactly does LMI do? And how can you benefit from it as a borrower?

What is Lenders Mortgage Insurance (LMI)?

By using LMI, lenders can offer lower-deposit home loans. Depending on your lender’s requirements, LMI allows you to borrow up to 95% of the purchase price of your home.

LMI is a type of insurance that protects the lender in the event a borrower defaults on their mortgage loan. It is typically required by lenders when a borrower has a deposit of less than 20% of the property's purchase price (in other words, a loan-to-value ratio (LVR) of 80% or more).

How does LMI work?

When you apply for a home loan with a deposit of less than 20%, your lender will assess the risk and determine if LMI is required. If the insurance is necessary, you will be responsible for paying the LMI premium. This premium can be added to the overall loan amount or paid upfront, depending on your lender’s policies.

LMI is a commonly misunderstood financial product — some borrowers think it is for their protection while others have zero knowledge about what it does.

As mentioned earlier, LMI is not designed to protect the borrower but rather the lender. Even though the borrower pays for the insurance, the benefit goes solely to the lender, allowing them to lend to riskier borrowers without significantly increasing their exposure to potential losses.

How much does LMI cost?

The cost of LMI can vary depending on your lender and your financial circumstances at the time you are applying for a home loan.

Here are the factors that can affect the cost of LMI:

  • The size of your loan
    The higher the amount you wish to borrow, the higher your LMI premiums would be

  • Loan-to-value ratio (LVR)
    Refers to the percentage of the property's value that you are borrowing through a home loan

  • Your deposit
    As a rule of thumb, if your deposit is less than 20% of your property’s assessed value, you will be charged with LMI

  • The state where you live
    This can affect your property’s value

  • Whether you are a first-home buyer, owner-occupier, or investor
    Lenders have different premium rates for each type of borrower

  • Your job and industry
    Some borrowers in high-demand and well-paying professions are eligible for an LMI waiver

There are online tools that can help provide an estimate of how much your LMI will be — you just need to provide details such as your property’s value and your intended loan amount.

Using Your Mortgage’s Lenders Mortgage Insurance Calculator, here is a sample computation of the cost of LMI:

Sample calculation of LMI for first-home buyers:

Property Value

Loan Amount

Loan-to-value ratio

Deposit (% of the property value)

Estimated LMI

$600,000

$510,000

85%

$90,000 (15%)

$5,100

$540,000

90%

$60,000 (10%)

$9,828

$570,000

95%

$30,000 (5%)

$31,008

Sample calculation of LMI for non-first-home buyers:

Property Value

Loan Amount

Loan-to-value ratio

Deposit (% of the property value)

Estimated LMI

$600,000

$510,000

85%

$90,000 (15%)

$5,100

$540,000

90%

$60,000 (10%)

$10,800

$570,000

95%

$30,000 (5%)

$34,485

Take note that the calculations above assume that the $600,000 loan is on a 30-year term. Computations can vary among lenders — it is best to check with your chosen loan providers to give you an estimate as to how much you will be charged for LMI. You can also use our LMI calculator for your own calculations.

Things you should know about LMI

Here are five crucial things to note about LMI if you are planning to take advantage of it when borrowing for your home purchase:

  1. LMI is usually not optional: If your deposit is less than 20% of the property's value, the lender will likely require LMI. As mentioned earlier, however, there are some cases where you might be eligible for a waiver.

  2. Premium cost varies: The LMI premium rate can vary depending on the lender and the loan-to-value ratio. It is usually a percentage of the loan amount.

  3. Premium payment options: You can choose to add the LMI premium to the loan or pay it upfront in a lump sum.

  4. Premium non-refundable: In most cases, the LMI premium is non-refundable, even if you sell the property or refinance the loan later.

  5. Insurance for the lender: LMI protects the lender if you are unable to repay your loan, but it does not offer any protection for you.

Frequently Asked Questions about LMI

Can LMI be avoided?

Yes, by making a deposit of at least 20% of the property's value, you can avoid the need for LMI. There are also instances where you can be eligible for an LMI waiver, such as being in well-paid and high-demand professions or by getting assistance from the government’s deposit schemes.

See also: How to avoid paying LMI

Is LMI a one-time payment?

LMI is typically a one-time payment, either added to the loan or paid upfront.

Can LMI be transferred to a new property?

LMI is not transferable between properties. If you sell and buy a new property, a new LMI premium may be required.

Can I negotiate the LMI premium rate?

No, the LMI premium rate is set by the insurer and is non-negotiable.

Can I claim LMI as a tax deduction?

In some cases, LMI premiums on investment properties may be tax-deductible, but it's best to consult with a tax professional for advice.

Photo by @jittawit-tachakanjanapong on Canva.

Collections: