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.
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.
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.
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.
|Loan amount||$390,000||Loan to value ratio (LVR)|
|Loan amount||$410,000||Loan to value ratio (LVR)|
Copyright © Finconnect (Australia) Pty Ltd trading as "eChoice", ABN 45 122 896 477 Australian Credit Licence 385888, is a wholly owned subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124.
The purpose of this calculator is to assist you in estimating whether you will need to pay lenders mortgage insurance (LMI) based upon the information you put into the calculator.
The results of this calculator are estimates only. They are based on the information you have provided. If you change any of the information, you will obtain a different result. Other fees, charges and costs may apply.
The actual amount you can borrow, and the applicable loan repayments, can only be determined once you submit a full application to us and we assess your application using our credit criteria applicable at that time.
Before acting on the results of this calculator you should seek professional advice and speak to an eChoice consultant.
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|
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.
Despite its cost, Lenders Mortgage Insurance (LMI) does have some benefits that make it worth weighing up your options.
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.
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.
Working out whether you are liable for LMI is dependent on your individual circumstances. Talk to your lender to find out more.
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.
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!
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.
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.