All You Need to Know About Lenders’ Mortgage Insurance (LMI)

Saving for a home deposit can be extremely demanding, especially when you are dealing with other expenses such as rent, childcare and day to day life. Most lenders recognise that saving a 20% deposit would take tens of years for the majority of Australians, even if they are otherwise financially responsible. For this reason, they offer the solution of Lenders’ Mortgage Insurance (LMI).

LMI is designed to protect the lender. If a borrower defaults on their loan and the sale of the property does not cover the unpaid value of the mortgage, the bank can claim the additional costs against the LMI policy. By reducing the risk to the lender, LMI allows banks and other financial institutions to lend larger amounts of money and approve more home loan applications.

Many people believe that LMI is designed to protect the borrower, however that is not the case. LMI only covers the lender in case of default. There is additional insurance available to home buyers known as Mortgage Protection Insurance which can cover the borrower’s costs in case of unfortunate events, and you should speak with your broker if you think this type of protection would be beneficial to you.

When is LMI payable?

Generally, a lender will require LMI to be purchased if the deposit for the property is less than 20% with no guarantors involved – in other words, when the loan to value ratio (LVR) is more than 80%.

If your lender requires you to pay LMI, it will usually be paid at the drawdown of the loan. You will have the option to pay cash up front, or in many cases it can be capitalised into the total loan amount. It is a one-off cost so there is no need to make annual insurance payments, however the premiums are typically non-refundable in case you decide to refinance to another institution.

How much is it?

LMI premiums vary between lenders and mortgage insurers, so it isn’t possible to calculate an exact amount until you complete your application. It is usually based on a percentage rate of your total mortgage amount, on a sliding scale which increases as the LVR increases and as the loan value increases. Speak with your broker to calculate an approximate LVR cost for your loan and circumstances.

Depending on which state you live in, stamp duty is also payable on top of the premium.

Can LMI be waived?

The short answer is…yes! However, an LMI waiver is very difficult to secure except in specific circumstances. Certain lenders are willing to waive the fee for professionals within a predetermined list of industries, such as doctors, lawyers and other professional fields. Speak with your broker to see whether you may qualify for an LMI waiver, potentially saving tens of thousands of dollars!