Lenders Mortgage Insurance (LMI) is an insurance policy that provides protection to a bank or home loan lender in the event that a borrower can’t make the necessary repayments on a mortgage. Your mortgage lender may require you to pay LMI as a condition of borrowing from them.
Most LMI policies stipulate that a lender can make a claim if a borrower defaults on a loan and the property sale price is lower than the value of the mortgage. A lender will usually seek to recover the difference from the LMI provider, and the provider may then seek to recover that amount from the borrower or their guarantor (if they have one).
Traditionally, borrowers are required to put down a 20% deposit on the total value of their mortgage. If you need or want to borrow more than 80% of the value of the property, you will generally be required to pay LMI. However, there are some exceptions.
Some lenders offer specialist home loans for specific professionals and offer higher loan-to-value ratios (LVRs) which offer the ability to avoid lenders mortgage insurance altogether.
There are a number of factors that can affect the cost of LMI:
- The size of the loan – larger loans come with higher risk and typically have higher LMI costs
- The deposit percentage and property value – the size of your deposit relative to the value of the property impacts how much LMI you have to pay
- Your other assets and debt
- Your credit history.
Depending on the factors above, LMI could cost between $5 000 and $40 000 initially. Genworth’s LMI premium estimator can give you an indication of the LMI premium payable.
Typically, LMI is added to the total loan amount when you take out a home loan. This means that you pay interest on the loan value and the LMI amount over the lifetime of the home loan.
For example on a loan amount of $500 000 for a property valued at $600 000, the Loan to Value Ratio (LVR) would be 83.33%. This means that LMI is required from most lenders.
As mentioned above, there are various factors that come into play for a lender when calculating the LMI value. If in this example the amount was determined to be $4 150, this would be added to your loan amount giving you a total loan of $504 150. Repayments and interest would then be calculated on this amount for the term of your loan.
The most common way to avoid paying LMI is saving enough money upfront for a deposit of at least 20%, as well as having some additional savings to pay for other fees and charges.
Saving 20% or more for a home loan deposit is a challenge for many borrowers, especially first homebuyers. When a 20% deposit isn’t feasible, borrowers can also avoid LMI by finding someone willing to go guarantor on their loan. (Note that this can sometimes be a challenge, as this practice isn't as common as it used to be.) The guarantor (such as a parent) assumes the risk if the borrower defaults on the loan. Keep in mind that many banks and financial institutions don’t offer guarantor home loans with deposits less than 20%.
Another option to avoid LMI is to seek out a specialist loan from a lender that waives LMI for people in certain professions. At BOQ Specialist, we offer home loans for medical professionals, such as doctors and dentists, with no LMI on loans up to 100% of the property value. If you’d like more information on our BOQ Specialist home loans, get in touch with a specialist near you.
The information contained in this article (Information) is general in nature and has been provided in good faith, without taking into account your personal circumstances. While all reasonable care has been taken to ensure that the information is accurate and opinions fair and reasonable, no warranties in this regard are provided. We recommend that you obtain independent financial and tax advice before making any decisions.