Lenders Mortgage Insurance, commonly known as LMI, is a significant cost that many Australian home buyers must pay when purchasing property with a smaller deposit. Despite its name, LMI protects the lender, not you. Understanding how it works, what it costs, and how to avoid it can save you thousands of dollars.
What Is Lenders Mortgage Insurance?
LMI is an insurance policy that protects lenders if a borrower defaults on their home loan and the sale of the property does not cover the outstanding debt. When you borrow more than eighty percent of a property's value, lenders consider the loan higher risk. LMI enables them to offer these high-LVR loans while transferring the default risk to an insurance provider.
Importantly, LMI protects only the lender. If you default and the property is sold for less than you owe, LMI covers the lender's loss, but the insurer can still pursue you for the shortfall. You receive no protection from the premium you pay.
When Is LMI Required?
LMI is typically required when your loan-to-value ratio exceeds eighty percent. The LVR is calculated by dividing your loan amount by the property value. For example, if you borrow six hundred and thirty thousand dollars to purchase a seven hundred thousand dollar property, your LVR is ninety percent, and LMI will apply.
Some lenders trigger LMI at slightly different thresholds, and the premium increases as your LVR rises. Borrowing at ninety-five percent LVR costs significantly more in LMI than borrowing at eighty-five percent.
How Much Does LMI Cost?
LMI premiums vary based on your LVR, loan amount, and the insurer your lender uses. As a general guide, LMI on a six hundred thousand dollar loan at ninety percent LVR might cost between twelve thousand and eighteen thousand dollars. At ninety-five percent LVR, the premium could exceed twenty-five thousand dollars.
Use our LMI calculator to estimate the cost based on your specific property value and deposit. The results can be eye-opening and might motivate you to explore alternatives.
LMI can be paid upfront at settlement or capitalised into your loan. If capitalised, you pay interest on the LMI amount over your entire loan term, making the true cost even higher. On a thirty-year loan, a fifteen thousand dollar capitalised LMI premium could cost you over thirty thousand dollars in total when interest is included.
How to Avoid Paying LMI
The most straightforward way to avoid LMI is to save a twenty percent deposit. This brings your LVR to eighty percent or below, eliminating the need for insurance. While saving this much takes longer, the LMI savings can be substantial.
Government guarantee schemes like the First Home Guarantee allow eligible first home buyers to purchase with just five percent deposit without paying LMI. The government guarantees up to fifteen percent of the property value, covering the gap that would normally require LMI. Places in these schemes are limited and income caps apply.
A guarantor loan is another option. A family member uses their property as additional security for your loan, allowing you to borrow at a higher LVR without LMI. This involves risk for the guarantor, who could lose their property if you default, so it requires careful consideration and legal advice.
Some lenders offer LMI waivers for certain professions considered lower risk, such as doctors, dentists, lawyers, accountants, and engineers. These professionals can often borrow up to ninety percent LVR without LMI, saving thousands of dollars. If you work in an eligible profession, seek out lenders offering these waivers.
Is Paying LMI Worth It?
While LMI represents a significant cost, it is not always something to avoid at all costs. In some situations, paying LMI makes financial sense.
If property prices in your target area are rising faster than you can save, delaying your purchase to avoid LMI might mean paying more for the property itself. The additional LMI cost could be less than the price increase during the extra years of saving.
Similarly, if you are currently paying rent that exceeds what your mortgage repayments would be, entering the market sooner, even with LMI, might leave you better off financially than continuing to rent while saving for a larger deposit.
However, if property prices are stable or falling, and your rent is reasonable, saving for a larger deposit to avoid LMI often makes more sense. Each situation is different, and the decision requires careful analysis of your personal circumstances and local market conditions.
Questions to Ask Your Lender
When comparing loans, ask lenders about their LMI policies. Different lenders use different insurers with different premium structures. The LMI quote from one lender might be thousands of dollars more than another for the same loan amount and LVR.
Ask whether the LMI premium is fixed or can change before settlement. Confirm whether you can pay upfront or must capitalise it. Enquire about any LMI waivers for professionals that might apply to you. Understanding these details helps you make an informed decision and potentially save money.
Use our LMI estimator as a starting point, then get formal quotes from lenders you are considering. The actual premium will be confirmed when you apply for pre-approval.