What is Lenders Mortgage Insurance?
6-MINUTE READ
Saving for a home is a tough challenge. Whether you’re a first-time buyer or an expat buying an investment property, it’s hard work saving that 20% down payment. Lenders Mortgage Insurance LMI – also known as a low deposit premium – is often a requirement if your home loan deposit is not considered significant enough by the lender.
If you’re not too sure what the Lenders Mortgage Insurance premium is, whether you’re expected to pay it or how to pay it, don’t worry. We’ll run through everything you need to know about LMI for home buyers.
What Is LMI? How Does it Work?
Lenders Mortgage Insurance LMI is a premium on your home loan that is designed to protect the lender if the borrower defaults on their loan repayments. If the property sale does not equal the unpaid value of the home loan, the lender will claim on the LMI insurer.
Let’s take a look at an example of how LMI works. If the home buyer defaults on their home loan with $60,000 left to pay, the lender sells the property to recover this amount. However, they only earn $550,000 from the property sale. The lender will claim the $50,000 shortfall from the mortgage insurer.
Therefore, the credit provider only requires risky borrowers to pay LMI by a one-off payment that can be paid upfront or capitalised on the home loan. Usually, customers are judged risky by having a small home loan deposit. Typically, the bigger the deposit, the less likely you will need to pay LMI. Although, some home buyers see the value in paying LMI rather than saving for a large deposit.
Often confused with mortgage protection insurance, LMI is designed to protect the lender. By using LMI, many lenders are able to widen their customer base by approving more home loan applications and lending larger amounts of money.
The two leading mortgage insurance lenders in Australia are Genworth Financial and QBE. However, the home buyer doesn’t need to organise the LMI premium; the lender will sort this out.
What's Mortgage Protection Insurance?
Unlike LMI, mortgage protection insurance covers the borrower if they cannot make their loan payments. Usually, they will only cover expenses if the borrower passes away or is disabled for a time, including losing their job or an inability to work due to illness or injury. It’s your choice whether you take out mortgage protection insurance.
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When Is LMI Required?
Home buyers are judged whether they are a risk or not by their Loan to Value Ratio during the home loan application process. The LVR is calculated by dividing the home loan amount by the property value.
For example, if the home buyer has a deposit of $200,000 for a property with a purchase price of $1,000,000, they’ll only need to borrow $800,000. Therefore, their Loan to Value Ratio is 80%. Generally speaking, most lenders require home buyers to have an LVR of 80% or lower. With an LVR of more than 80%, you will likely be expected to pay LMI.
This is because the credit provider views it risky to lend such a high amount to someone with insufficient evidence of their ability to save or repay the money.
Different lenders have different rules, so it is a good idea to check with your individual lender about how they assess the requirement for paying LMI.
Do Expats Have to Pay LMI?
Even though many lenders consider expats to be risky customers, they are not automatically expected to start paying LMI. Generally speaking, expats are subject to the same requirements as those living in Australia; they usually only have to pay LMI if their LVR is above 80%.
However, the home loan application process can be more stringent for expats and foreign nationals.
Odin Mortgage are experts at securing competitive rates for expats and foreign nationals. We’ll offer personal advice and ensure that you get a fair loan.
How Much Does LMI Cost?
LMI can be a significant addition to your home loan. Anywhere from a few thousand to tens of thousands of dollars, LMI can drastically change the shape of your home loan repayments. That’s why it’s essential to consider this cost when planning your overall budget.
The cost of LMI can vary from lender to lender; however, generally, it is based on the following questions:
- Are you a first-time buyer?
- What state is your new property in?
- Are you an owner-occupier or investor?
- How big is the loan?
- What is your LVR?
- What’s your job or industry?
We used the Genworth LMI calculator to estimate that as an expat buying an investment property in Australia, you’ll be expected to pay the following.
Property Value | Deposit ($) | Deposit (%) | Loan Term | Upfront LMI Premium | Monthly LMI Premium |
$400,000 | $20,000 $40,000 $60,000 | 5% 10% 15% | Up to 30 years | $15,190.50 $8,889.55 $4,815.63 | $318.68 $212.34 $134.65 |
$600,000 | $30,000 $60,000 $90,000 | 5% 10% 15% | Up to 30 years | $30,593.45 $16,957.23 $8,268.95 | $478.02 $318.52 $201.97 |
$800,000 | $40,000 $80,000 $120,000 | 5% 10% 15% | Up to 30 years | $40,791.27 $22,609.64 $11,025.27 | $660.73 $436.09 $280.07 |
How to Avoid Paying LMI
LMI is a weighty expense for many home buyers. However, it is worth remembering that without the LMI fee, many first-time buyers would be locked out of the market, struggling to save a 20% deposit.
Yet, there are other ways to avoid paying LMI, or minimising the LMI premiums, if you cannot afford to lower your LVR below 80%.
Use Your Profession to Your Advantage
Some lenders and banks consider waiving the LMI premium for a few accepted professions, such as those in the medical, accounting, finance, legal or engineering industries. They might also consider waiving the LMI premium if you earn a high salary and have a solid professional employment history. If they don’t remove it altogether, they might reduce the LMI costs.
However, if you cannot save a 20% deposit, you should rethink whether you are financially able to make your mortgage repayments for the rest of the loan term. Regardless of your career or whether LMI costs are reduced, a home loan is a big financial commitment.
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Apply With Certain Lenders
Be strategic about who you borrow money from. Some lenders offer discounts for certain borrowers on the cost of LMI. Speak to home loan specialists or a mortgage broker about your personal circumstances and financial institutions lending criteria that might waive or reduce LMI.
First Home Loan Deposit Scheme
Eligible first home buyers can access government grants, like the First Home Loan Deposit Scheme (FHLDS). This grant enables first-time buyers to purchase a home with a deposit as small as 5%. The government acts as a guarantor for the remaining amount. Therefore, the buyer can get their house sooner and doesn’t have to pay the cost of LMI.
Although, eligibility of the scheme depends on where the property you are buying is located, your income, the loan amount, and the value of your prospective new home. Buyers must use the scheme to buy a residential property only.
Eligible customers covered by this scheme can also access other government initiatives that help first-home buyers get on the property market. These might include the First Home Super Saver Scheme , Home Builder Grant, or First Home Owner Grant.
Have a Guarantor
If you’re not eligible for the First Home Loan Deposit Scheme, you still might be able to use a guarantor to avoid paying the LMI cost. Many lenders won’t charge you mortgage insurance LMI if the borrower has a reliable guarantor to back them. Essentially, the guarantor accepts responsibility for making the mortgage repayments if the borrower defaults.
Often the guarantor is a family member. They can also use their own property’s equity to guarantee your loan repayments.
Buy in Partnership With Someone
If you don’t have the option of a guarantor, struggling to get your LVR below 90%, and are not eligible for waivers, discounts, or schemes, consider buying jointly. Partnering with a sibling, friend, or spouse and buying as a joint venture is an excellent way to avoid LMI. You both contribute to the deposit while lowering your financial risks and obligations and can get into the Australian housing market sooner.
However, be aware that you will be eligible to pay the stamp duty surcharge if you are partnering with a foreign national. This is usually a 7-8% surcharge on top of the standard stamp duty. So, if you are jointly buying with a foreign partner, the stamp duty surcharge might undo any savings you make on avoiding LMI.
How to Pay LMI?
Typically, there are two ways to pay the cost of LMI. Either you pay it upfront, the option generally preferred by lenders. However, other financial institutions will let you capitalise LMI on your home loan. Therefore, the borrower pays it gradually over time as additional ongoing or monthly fees.
Unfortunately, while the latter is more manageable for many borrowers, you end up paying more money over time as you accrue more interest.
For example, if your property value is $800,000, then the total home loan amount is $750,000, of which $26,039 is LMI. At an interest rate of 2.29% and a loan term of 30 years, you could expect to pay $2,881 per month. However, if you paid the premium upfront, your monthly home loan payments would equal $2,782 a month.
How Will It Affect My Home Loan Repayments?
Paying lenders mortgage insurance can account for a significant proportion of your home loan. This is especially the case should you need to capitalise the LMI on your home loan. You may need to rethink your budget for buying your own property.
Your mortgage broker will assist you in adding up all the involved costs of your loan, so you’ll know the estimated cost you need to save for your property purchase.
However, the loan approval process may take longer and be more complicated than the average application with an 80% LVR. You have to qualify for the lending criteria of the financial institution you are borrowing from and the LMI insurers’ qualification guidelines. As, in this case, it is the LMI provider taking on the risk of your loan, they may have stricter criteria.
As a result, the whole process may take longer. Seek professional advice to determine which relevant credit provider is likely to approve you for LMI and how long the application might take. Your mortgage broker will be able to recommend suitable lenders whose criteria will meet your personal objectives.
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Can You Get a Refund of LMI?
If, down the road, you want to refinance your loan with a new lender, then it’s improbable that you will be able to get your LMI refunded. Plus, if your LVR is still above 80% when you move to a new lender or buy another property, you’ll likely have to pay for LMI once more. This is because each lender has its own deals with its LMI provider.
However, if you refinance with the same lender or increase your loan, you may be eligible for an LMI discount.
Although, if you repay your loan early, or it ends for another reason, you may be able to get a partial refund. This depends on the lender, and you should ask this question before signing on the dotted line.
Generally speaking, in order to get a partial refund from the two primary LMI providers, you must meet the following requirements:
- You must not have defaulted, made late payments or paid in arrears.
- You must have repaid the loan within two years from the date settled.
- The refund amount must be more than $500.
It’s worth remembering that Genworth Financial no longer offers refunds on their LMI premiums with any of their lenders. They will only provide a discount if you’re internally refinancing or increasing your loan with the same lender.
QBE LMI offers refunds to some borrowers, depending on their arrangement with your lender and whether you meet the above requirements.
LMI vs. More Savings: Which Is Better?
One of the biggest debates among prospective homeowners is whether it’s better to fork out the money for the LMI premium or wait until they have managed to save up a larger deposit. There is no right or wrong answer. The housing market is volatile, and every buyer’s situation is different. If the time is right to buy a property, but you don’t have a 20% deposit, paying LMI might be worthwhile.
It’s best to speak to your broker to get personal advice about your financial situation to decide which option is best for you. In the meantime, let’s take a look at the pros and cons of LMI vs. bigger deposits.
Pros of LMI
If you’re keen to enter the property market – say property prices are low and you are concerned that the purchase price will increase – you may decide to pay LMI.
It might take a year or more to save a deposit worth 20% of the property value. When you have enough money, the housing market might have fluctuated, and your savings could fall short. In this instance, paying LMI will help you own your home sooner.
For instance, if you’re planning to save $100,000 for a $500,000 property, but house prices increase by 3% within the year it takes to save, you’ll be $30,000 short of the 20% you need.
Plus, in most cases, you might find that it makes more financial sense to buy a house now rather than later. This is often because the cost of LMI is typically less than the growth of property prices. For example, the sooner you have a property, the sooner you are able to start getting equity on your home.
You can also use other measures to lower the interest paid on your home loan and counteract the additional interest accrued by the LMI premiums. For example, if you use an offset account, you use future savings to lessen the amount of money that you are charged interest on.
Pros of Saving a Larger Deposit
On the other hand, if you’re looking to buy a property in a reasonably stable area, waiting a year might do no harm. While you’ll need to wait longer, you will save yourself money on your loan repayments.
Another advantage of saving a bigger deposit is that you increase your borrowing power. The lender’s valuation might view you as less risky if you have more money saved. Therefore, they might be prepared to lend you a higher loan amount. You might also be able to access other discounts – such as an offset account or waiving ongoing fees – and benefits available only to those with more extensive deposits.
Speak to your mortgage broker about the best option for you and come up with a savings plan to ensure that you are on track to purchase your own home in the near future.
Stamp Duty and Taxes on LMI
Typically, you have to pay stamp duty and a goods and services tax on LMI. However, these are generally included in the total price quoted by your lender. Speak to one of our expert mortgage brokers about how much you might expect to pay in LMI.
In Summary,
There is no right or wrong answer about whether you should pay LMI on your home loan or save up a 20% deposit. Different buyers have different situations. It’s best to carefully consider your individual financial situation and speak to an expert on home loans to make your mortgage choice.
Whether or not you pay LMI, it’s crucial that you understand the pros, cons and what it entails so that you can make an informed decision. Speak to one of our experts at Odin Mortgage today.
Get a free Australian mortgage assessment today.
Frequently Asked Questions
How Is Lenders Mortgage Insurance Calculated?
LMI is calculated by using a percentage of the loan amount and your Loan to Value Ratio (LVR). The higher your LVR and the higher the amount of money you wish to borrow, the more LMI you will be required to pay.
The amount of LMI you pay also depends on the type of loan you wish to take out. For example, there is a difference in LMI premiums for first-time buyers and established homeowners. Plus, if you’re purchasing an investment property or an owner-occupied home, then the LMI will be calculated differently.
Generally, the way it is calculated depends on your Lender and their understanding with their LMI provider.
Can Lenders Mortgage Insurance Be Added to Loan?
Yes. While many lenders prefer borrowers to pay LMI upfront, there is the option to add it to your loan. This means that you pay your premiums alongside the monthly mortgage repayments. While this might be more manageable than making an upfront payment, it will increase the amount of interest you pay on your home loan over time. Speak to your mortgage broker about the best way to pay LMI.
How Can I Avoid Lenders Mortgage Insurance?
You can avoid paying LMI by saving up a larger deposit. If your LVR is higher than 80%, you are required to pay LMI. However, if you save a deposit of 20% or more of the property price, then you will get out of paying LMI.
There are other ways to avoid or reduce your LMI payments. Some professions in some industries are eligible for discounts. Or, you can use a guarantor or government grant to take responsibility for up to 15% of the unpaid deposit.
How Do I Get Rid of Lender Paid Mortgage Insurance?
The only way to get rid of LMI is to reach 20% equity on your property and then refinance your loan. However, you won’t be able to get a refund on the LMI payments already made. Nor will you be able to get rid of LMI if you refinance before you have 20% equity on your home.
See What You Qualify For
