What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) protects the lender in the event that you default on your home loan.
It’s applicable only if your home loan poses a high risk to the bank, which is typically when you’re borrowing more than 80% of the purchase price.
You may be able to avoid this cost.
How Does LMI Work?
As a general rule, you will need to pay LMI if you are borrowing more than 80% of the property value. For self-employed individuals applying for a low-doc loan due to an inability to prove income, LMI is necessary if you’re borrowing more than 60% of the property’s value. Your lender or bank arranges the mortgage insurance during your loan approval process, so you won’t have to deal with additional paperwork.
Please call us on 1300 889 743 or enquire online for free and we can tell you if LMI can be waived for your mortgage!
The LMI premium will be deducted from your loan funds when they are advanced. For example, if you borrow $500,000 and the LMI premium is $5,000, you will receive $495,000 when the loan is disbursed. The exception is if you choose to “capitalise” the LMI premium, adding its cost to your mortgage. This doesn’t eliminate the LMI but allows you to avoid paying it upfront. The LMI premium is a one-time fee and doesn’t need to be paid annually like other types of insurance.
How LMI Helps Borrowers Buy A Home
LMI enables borrowers to purchase a home with a smaller deposit, reducing the upfront cost and allowing quicker access to property ownership. It’s particularly beneficial for first-time homebuyers and those with less in savings. However, it is crucial to understand the cost implications and explore whether there are ways you can avoid this expense.
How Much Is LMI?
The cost of Lenders Mortgage Insurance can vary widely based on the loan amount and the percentage of the property value being borrowed, often representing a large expense. It’s crucial to incorporate this cost into your overall budget when planning to purchase a home, as it can substantially affect your financial planning.
| Loan Amount | LVR | LMI |
|---|---|---|
| $500,000 | 85% | $5,000-$5,600 |
| $500,000 | 90% | $11,000-$13,000 |
| $500,000 | 95% | $13,000-$15,000 |
| $1,000,000 | 85% | $11,000-$14,000 |
| $1,000,000 | 90% | $30,000-$35,000 |
| $1,000,000 | 95% | $33,000-$40,000 |
15% LMI Discount For First-home Buyers
One of our lenders is now offering attractive discounts on Lenders Mortgage Insurance (LMI) under specific conditions, providing more flexibility and savings for homebuyers.
- Upfront Payment Discount: If you pay the LMI premium upfront when you buy an owner-occupier or investment property, you are eligible for a generous 15% discount on LMI.
- First-home Buyer Discount: First-time home buyers get a calculated discount which is dependent on the loan’s attributes.
- Combined Discounts: First-home buyers opting to pay LMI upfront can enjoy an additional discount of up to 15%, applied after calculating the First Home Buyer discount.
These discounts apply to new purchases, top-ups and refinances. If you choose the upfront payment option for an LMI discount, ensure the funds are with your conveyancer on settlement day. The upfront amount can be paid by the loan applicant, a family member, or any other person.
What does this mean for you?
For our clients, we typically add the LMI premium to the loan amount instead of requiring an upfront payment. This means if a client needs a loan of $500,000 and the LMI is $20,000, we would apply for a loan of $520,000. While this approach spares clients from paying the LMI upfront, it does increase the loan amount.
So, the discounted LMI becomes particularly beneficial for clients who might not have the borrowing power to handle a loan amount of $520,000 but have spare funds amounting to the LMI premium. In such cases, they can use these funds to settle the LMI separately upfront. However, it’s worth noting that this scenario might apply to only a small subset of clients.
How can I avoid paying LMI?
Here are several effective strategies to avoid paying Lenders Mortgage Insurance:
Save A Larger Deposit
Saving at least 20% of the property’s purchase price for your deposit can help you avoid the need for LMI. This not only reduces your loan amount but also demonstrates to lenders that you are a low-risk borrower.
Have A Guarantor
A guarantor, often a close family member, can use their property as additional security for your loan. This reduces the lender’s risk, allowing you to bypass the LMI requirement even if you have a smaller deposit.
Use Government Grants And Schemes
Some government grants and schemes are designed to help first-time homebuyers or those in specific circumstances boost their deposit. Taking advantage of these can help you reach the 20% deposit threshold more quickly, avoiding LMI.
Professional LMI Waivers
Certain professions, such as doctors and accountants, may be eligible for LMI waivers with specific lenders, due to their perceived low risk. Check if your profession qualifies for any LMI discounts or waivers.
Apply for A home loan
Our expert mortgage brokers have in-depth knowledge about Lenders Mortgage Insurers and the guidelines they use to assess loan applications.
Please call us on 1300 889 743 or enquire online to discuss your situation with one of our brokers, today!
Frequently Asked Questions
Is LMI Part Of A Home Loan Deposit?
No, Lenders Mortgage Insurance (LMI) is not part of your home loan deposit. The home loan deposit is the initial amount you contribute towards the purchase of a property, typically representing a percentage of the property's purchase price. LMI is a separate cost that protects the lender in case you default on your loan.
How Does LMI Protect The Borrower?
Who Are The Main Mortgage Insurers In Australia?
How Is LMI Calculated?
Which Professions Are Eligible For An LMI Waiver?
Do You Have To Pay LMI When You Refinance?
Does LMI Affect Interest Rates?
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