Chances are, if you need to borrow more than 80% of the value of your property, then you’ll need to pay Lenders Mortgage Insurance (LMI).
Sometimes, saving a 20% deposit can seem impossible, taking advantage of a mortgage insured loan can help you get into the property market sooner.
Depending on your loan-to-value-ratio (LVR), LMI can be a significant expense and may cost anywhere from a few thousand up to tens of thousands of dollars. The cost of LMI can vary based on several factors including:
- If you’re a first-home buyer
- If you’re an owner occupier or investor
- Some lenders charge a risk premium if borrowers are self-employed.
Lender’s mortgage insurance may seem expensive, but the upside is that it can help you to get into the property market sooner and help you face your required 20% deposit rising faster than you can save as property prices rise over time.
To help you understand LMI better we’ve set out a few frequently asked questions and answers to them.
What is Lenders Mortgage Insurance?
LMI protects the lender if the bank has to foreclose on the mortgage and ends up selling the property for less than the outstanding balance on the loan. Essentially the lender charges borrowers a once off insurance premium which is added to the loan and can be paid off over time along with the mortgage.
LMI providers may also conduct background checks to see if a borrower can afford to make monthly repayments and may have more restrictive lending policies than the lender.
When a bank makes an LMI claim, the insurer pays the bank. LMI does not diminish the borrower’s liability under the loan contract.
The most common way people avoid paying LMI is by meeting the 20% deposit requirement set by lenders. This means you only borrow 80% of the property’s value.
First-home buyers can apply for a range of government-sponsored subsidies such as the First Home Loan Deposit Scheme (FHLDS), which grants eligible borrowers a special government guarantee that waives LMI fees for as low as 5% deposit.
For single parents, there is the Family Home Guarantee that can help them purchase a home with as little as a 2% deposit.
How much does it cost to avoid LMI?
The most common way people avoid paying LMI is by meeting the 20% deposit requirement set by lenders. This means you only borrow 80% of the property’s value.
First-home buyers can apply for a range of government-sponsored subsidies such as the First Home Loan Deposit Scheme (FHLDS), which grants eligible borrowers a special government guarantee that waives LMI fees for as low as 5% deposit.
For single parents, there is the Family Home Guarantee that can help them purchase a home with as little as a 2% deposit.
Another way is to have a family member stand as a guarantor for your loan.
Does LMI have to be paid upfront?
While LMI premiums are one off upfront premiums, they are typically added to the loan by the lender and paid off over time.
Capitalising your LMI premium essentially means you’re adding it to the total loan amount and paying it off in regular instalments with your home loan which means you’ll pay interest on it, which will increase the minimum monthly loan repayments. You may also be charged a higher interest rate for LMI loans than would apply if you had a full 20% deposit.
Can LMI be refunded?
Generally, LMI is a non-refundable fee in the process of applying for a home loan. However, as the lender designs each LMI policy to fit the individual borrower, there are (very rare) special circumstances where you might be eligible for a partial refund, eligibility will vary depending on the borrower.
LMI premiums are also not transferable, which means you cannot transfer your policy if you switch to another lender or sell your home and buy a new one in the future.
Which professions can access a lenders’ mortgage insurance waiver?
LMI providers are often willing to lend more money to people in “high-demand and well-paying” professions. These include doctors, dentists, some other medical professions as well as lawyers and accountants, who are considered low-risk borrowers and may be eligible for an LMI waiver.
NB: meeting the criteria does not automatically qualify for an LMI waiver. Lenders typically require borrowers to have a clean credit history, regardless of their profession. There may also be restrictions on what type or location of property a lender will offer an LMI waiver on.
Is LMI the same as mortgage protection insurance?
No. Sometimes, there is confusion between LMI and Mortgage Protection Insurance. These are entirely different products. Mortgage Protection Insurance protects borrowers in case of loan default due to death, sickness, disability, or unemployment. LMI protects the lender only, the benefit to the borrower of utilising LMI is being able to enter the property market with less than a 20% deposit.
Is Lenders Mortgage Insurance tax deductible ATO?
You can claim a tax deduction for loan establishment fees and lenders mortgage insurance as borrowing expenses if it is incurred on the purchase of an investment property. (As always we recommend seeking specific tax advice from your accountant to confirm whether this applies in your circumstances)
Is LMI the same as stamp duty?
LMI is an insurance premium. Stamp Duty is a government fee payable regardless of the size of your deposit. Depending on the state you are buying in, you may be eligible for a stamp duty concession if you are a first home buyer and if the value of your property is below the value mandated by the state.
How is lenders’ mortgage insurance calculated?
Each insurance provider calculates LMI premiums slightly differently using a range of factors, including the size of the loan, deposit amount, loan type, and the borrower’s employment status.
In researching the most suitable options for our clients, we take the varying costs and LMI policies into account. Each lenders may have “sweet spots” where you get the best value for money, an extra $500 in your deposit can make a significant difference. We always work to find this “sweet spot” for our clients.
Is taking out lenders’ mortgage insurance worth it?
In a property market where prices are rising quicker than you can save, especially when rents are rising, or if there’s a rare, limited-time opportunity for you to snap up your dream house at a good price, getting in faster and paying the extra fee can unlock options. In these cases LMI pay will be worthwhile.
