Lenders Mortgage Insurance (LMI) is an insurance that covers the lender if a borrower fails to keep up with their mortgage. It allows borrowers with smaller deposits to qualify for larger loans, as lenders are more willing to lend money to 'high-risk borrowers' if the insurance policy covers the risk of default. LMI has historically been a feature of Australia's property market. Still, as homeowners are increasingly looking for ways to avoid paying LMI, it's rapidly being replaced by new services such as deposit boost loans.
When does lenders mortgage insurance apply?
If you're applying for a standard home loan, lender's mortgage insurance usually applies when the size of your deposit is below 20%. You'll often see this described as having a loan-to-value ratio of >80% of the purchase price. During the application process, if your deposit is less than 20% of the purchase price, you'll be told to 'pay LMI' if you continue with the loan application.
How much does LMI cost?
The cost of LMI is calculated as a percentage of the amount you borrow. The LMI fee increases if you borrow more money at a higher LVR. It can be charged as a one-off fee or added to the total value of your home loan. It's important to note that if you add it to your home loan, your LVR will increase.
As part of saving for a home loan, if you opt for LMI, you need to factor in LMI charges along with other upfront fees such as stamp duty, mortgage protection insurance (often recommended for homeowners with a home loan) and moving costs.
How is the LMI premium paid?
The lender will pay the LMI premium to the insurer at the settlement of your home purchase. This one-off upfront payment covers the lender for the life of the loan (up to 30 years).
Can I get an LMI waiver?
Not all first-home buyers have to pay for LMI. Some pathways to homeownership, don't require you to pay LMI. There are also some exempt professions.
Which professions don't need to pay LMI?
- Accounting professionals with membership to an eligible accounting institute
- Lawyers and solicitors with a current practising certificate in Australia
- Barristers, judges and magistrates
- Some medical professionals, including medical practitioners, dental practitioners, Specialists, physiotherapists, chiropractors, optometrists and vets. It does not include psychologists, midwives or many other medical professionals.
For those considering an LMI waiver as part of their home loan application, it's essential to know that even without paying LMI, your interest rate will not be based upon an 80% LVR loan. You will likely be charged a higher interest rate as your total loan size is still larger than 80%. You can get the help of a mortgage broker or review the product disclosure statement or key fact sheet to confirm which interest rate you'd qualify for.
Pros and cons
Depending on your personal objectives, the value of the property you're hoping to buy and the upfront costs needed to purchase it, LMI might be suitable for your new home. A few things to consider are below.
- You can apply for a home loan with a smaller deposit.
- You don't need financial support from a family member in the form of a gift or guarantor, and you're still eligible for the first home loan deposit scheme.
- You can add the cost of LMI to your loan balance (not paying upfront).
- It's not there to protect you. It's there to protect your home loan provider and the LMI provider.
- It can cost tens of thousands of dollars upfront or more in home loan repayments if added to your home loan amount.
Do you have to pay LMI if you’re refinancing?
You may need to pay for LMI again. If you refinance to a different financial institution or a different lender, even with a bigger deposit, if your LVR is above 80%, you will be charged LMI again.
How Does Lender's Mortgage Insurance Affect Your Loan?
While LMI can help you access larger a home loan, it can also increase the size of your home loan if you add the cost of LMI to your home loan amount. This means over your loan term you may pay more interest.
What happens if I cannot repay my loan and my home is sold?
If you cannot meet your mortgage repayments and it cannot be resolved, your property may be sold to cover the outstanding loan amount. In case of a 'shortfall'—where the sale proceeds don't cover the outstanding loan balance—the lender would recoup this loss from their LMI policy provider. The LMI provider may then ask you, the borrower, to repay this directly to them. Australia's leading provider of LMI insurance to lenders is Genworth.
All LMI insurers have hardship policies in place. It may be possible to arrange a deferral or payment plan to help you pay off the debt in instalments.