Understanding Lenders Mortgage Insurance (LMI)

Understanding Lenders Mortgage Insurance (LMI)

Kathryn Lee - 17 Dec, 2020

Chances are you’ve heard the phrase ‘Lenders Mortgage Insurance’ thrown around, or maybe even the acronym ‘LMI’, but how many of us know exactly what this means?

If you’re anything like most first-time home buyers, you may be unsure about this supposed extra cost towards buying a home – that only some people have to pay. You may be wondering who pays LMI, why they pay it and exactly what costs are involved.

If you’re new to the property investment world, don’t fret because we’re about to give you the low-down on everything you need to know about LMI – including what it is, how you can avoid it, and why you might need to pay it.


What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance is a form of insurance that is paid by the home loan owner but designed to protect the lender, just in case you default on your home loan and can no longer make your repayments.

The important thing to recognise is that not everyone pays for LMI. Usually, LMI is only required when the borrower is taking out a loan for 80% or more of the value of the property (meaning they do not have the ‘traditional’ 20% deposit). This percentage is otherwise known as the Loan-to-Valuation-Ratio or LVR, and in most cases, if your LVR is over 80%, you will most likely be required to pay for Lenders Mortgage Insurance.

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An important distinction to make is that LMI is not there to cover you (or your guarantor), it simply exists to protect your credit provider in the event that you cannot pay back your loan.

How do you calculate LVR (Loan-to-Value-Ratio)?

The Loan-to-Value-Ratio (LVR) is used to help determine whether you will need to pay Lenders Mortgage Insurance. Usually, an LVR value of over 80% suggests that you will need to pay LMI.

The LVR can be calculated by dividing the loan amount by the value of your property. Alternatively, if you’re not a fan of numbers you can use eChoice’s LVR Calculator instead.

For example, if Jenny was getting a loan of $300,000 and her property was worth $450,000, her LVR would be approximately 67%, meaning she would most likely get away with not needing to take out LMI.

However, if Jenny’s LVR was 80% or greater, in most casesshe would need to take out LMI.

LVR Calculator

Loan details

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How is Lenders Mortgage Insurance calculated? How much does it cost?

Lenders Mortgage Insurance (LMI) is usually a one-off payment that lasts for the life of your loan. The cost depends on your Loan-to-Value-Ratio (LVR) as well as the amount you wish to borrow, and generally, as your LVR or borrowing amount goes up, so does the price of your insurance.

The following table can help you to estimate your potential LMI costs.

Know the cost of LMI premiums

Property Value Deposit LMI Estimate*
    First Home Buyer Buying Again
$350,000 $17,500 (5%) $11,172.00 $12,402
$35,000 (10%) $6,048 $6,710
$500,000 $25,000 (5%) $15,960 $17,718
$50,000 (10%) $8,640 $9,585
$750,000 $37,500 (5%) $32,134 $35,696
$75,000 (10%) $16,470 $18,293
$1,000,000 $50,000 (5%) $42,845 $47,595
$100,000 (10%) $22,050 $24,480

All calculations have a loan term of 30 years and are estimates only.

Calculate the cost of LMI premiums

To help you out, this calculator can also be used to estimate the cost of your Lenders Mortgage Insurance (LMI). Simply follow the link and enter your estimated property value, deposit amount, whether or not you are a first home buyer, as well as your loan term.

genworth-lmi-calculator
Genworth

What are the benefits of LMI for the borrower?

Despite its cost, Lenders Mortgage Insurance (LMI) does have some benefits that make it worth weighing up your options.

  • Buy a home sooner: In some cases fronting the cost of LMI can help you to buy a home sooner than it would to keep saving.
  • Buy before the market jumps: Although difficult to predict, in some cases paying LMI and getting into the market at a lower price point could leave you better off than waiting until you have a full deposit saved.
  • Stop renting: Paying LMI can help you to get into your new home sooner. Dependant on the situation, this could potentially work out better than continuing to pay rent.
LMI can allow buyers to take out bigger home loans than otherwise possible. This can give some borrowers a better chance at homeownership.

Do you have to pay LMI upfront?

Whilst LMI is a one-off payment, with most insurers there is usually some flexibility as to how it is paid.

The first way to pay for LMI is in a one-off, upfront payment. While for some this is no problem, for others it can be hard. In this case it may be possible to capitalise the payment into your mortgage.

Capitalising LMI into your home loan essentially means the cost of LMI is added to your home loan. This means you pay it off in regular instalments rather than one lump sum.

How long does LMI approval take?

The timeframe for LMI approval can differ from insurer-to-insurer so if you’re worried, it is usually better to ask directly. However, in saying this, most insurers should be able to give approval in one to two business days (assuming property valuation has already been completed).

Can LMI be waived?

In most cases, the simplest way to avoid LMI fees is to have a deposit equal to or greater than 20% of the value of the property.

For those yet to save for a standard deposit, LMI can sometimes be waived by government schemes such as the first home loan deposit scheme (FHLDS). It can also be avoided by having a guarantor sign onto your home loan – such as a parent. This effectively adds more equity to your application and bypasses the need for such a large deposit.

LMI-icons-family-guarantee2

Working out whether you are liable for LMI is dependent on your individual circumstances. Talk to your lender to find out more.

Is LMI refundable?

In some cases, LMI is refundable within the first one to two years, however, it depends on the conditions of your policy. For some policies, LMI refunds are not available under any circumstances.

For example, under some policies, if the home loan is paid off within a certain amount of time (usually under two years), the home loan owner will be entitled to a refund or partial refund of the cost of their LMI. However, for some home loans, no such clause exists.

In other cases, if within a certain amount of time (again, usually under two years) the homeowner decides to refinance and move lenders, for some policies the LMI can be refunded (or partially refunded). Again, whether this is possible is entirely dependent on your home loan policy.

It’s important to note that, even if your LMI is refunded, if your equity has not increased and your LVR is still greater than 80%, you will most likely still need to take out LMI (again) for the new home loan policy.

The most important thing to keep in mind is that the option of LMI being refundable is not a given, and it will depend on your particular policy – so be sure to ask!

Is LMI transferrable?

Unfortunately, when you move lenders, Lenders Mortgage Insurance (LMI) is not able to be transferred. However, in some cases, if you stay with the same lender, they will give you a discount on the new LMI policy – rather than have you move to a new lender altogether.

The fact that LMI cannot be transferred is an important point for mortgage holders to take into consideration when they consider moving to a new lender, with its implication being that if your equity is still not high enough, you will be required to take out LMI yet again, adding a significant cost to the value of your home loan.

Always consider that although you may be required to take out LMI again, this new lenders policy might be so good that it offsets this added cost. At the end of the day, every circumstance is different and only you, or your financial advisor, can really say which option is best for you.

Words by Kathryn Lee

Wondering if you’re liable for Lenders Mortgage Insurance? An eChoice mortgage broker can help you to assess your borrowing power and whether you’ll need to pay LMI.

What's my borrowing power if I earn $ per year?

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