What you need to know about Lenders Mortgage Insurance (LMI)

Lenders Mortgage Insurance is an insurance that protects the lender in case of a default on the property - it offers no protection to the home owners in the event they cannot make their repayments. For many borrowers it’s an unavoidable cost but you can take steps to limit how much it costs you and how you pay it.

What you need to know about Lenders Mortgage Insurance (LMI) in 2024

Lenders Mortgage Insurance (LMI) is a protective measure for lenders against the risk of borrower default. It comes into play when a borrower is unable to repay their loan and the lender faces a potential loss if the property is sold for less than the outstanding loan amount. Despite its name, LMI offers no protection to homeowners who find themselves unable to make repayments.

 

The need for LMI is closely tied to your loan-to-value ratio (LVR). If you have a deposit (or equity) of 20% or more, meaning your LVR is 80% or below, you typically won't need to pay for LMI. This is because a lower LVR represents less risk to the lender. As a general rule, the lower your LVR, the lower the perceived risk, and consequently, the lower (or non-existent) the LMI premium.

 

For many borrowers, particularly first-time homeowners, LMI is an unavoidable cost in their journey to property ownership. However, understanding how it works can help you take steps to minimise its impact on your finances.

 

How Much Does LMI Cost?

LMI is determined by two main factors: your Loan-to-Value (LVR) ratio and your total loan amount. However, LMI costs vary between lenders, even if these factors are the same.

You have two general options for paying LMI - either as a lump sum payment when your loan settles or the cost can be added on to your total loan amount. Although LMI is a one-time cost, you may have to pay it again if you move properties.

 

Tips to Avoid Paying LMI

Deposit size - The more money you've saved, the less likely you'll have to pay LMI. If you do find yourself having to pay LMI, your premium will be cheaper the lower your LVR is.

 

Use a guarantor - Having a family member use their property as security for your loan is a popular way of getting LMI fees waived.

 

Know your equity - LMI charges can happen when you move or switch properties. Borrowers who move into a new property may have to pay an LMI premium again if their loan still falls in a LMI threshold.

 

Borrow less - Borrowing less means you may need to look at less expensive properties. This way your deposit will instantly put more equity in your property.

 

Should you pay LMI upfront or add it to your home loan?

When faced with lenders mortgage insurance, borrowers often wonder whether it's better to pay the premium upfront or add it to their home loan. Both options have their pros and cons, and the right choice depends on your financial situation and long-term goals.

 

Paying LMI upfront means a larger initial outlay but saves you money in the long run as you avoid paying interest on the LMI premium. Adding LMI to your home loan allows you to spread the cost over the life of your loan, reducing the immediate financial impact, but you'll pay more over time due to the interest charged on the LMI amount. Let’s take a look at the differences…..

 

Let's look at the difference between the two

Assume you're buying a $700,000 property with a 10% deposit ($70,000), resulting in a $630,000 loan. Based on the LMI Cost Estimates table provided earlier, the LMI premium for this scenario would be approximately $26,740. Let's compare the two options over a 30-year loan term with an interest rate of 5.5% p.a.

 

Aspect	LMI Paid Upfront	LMI Added to Loan
Initial Loan Amount	$630,000	$656,740
Upfront LMI Payment	$26,740	$0
Monthly Repayment	$3,576	$3,728
Total Interest Paid (30 years)	$657,360	$685,340
Total Amount Repaid	$1,287,360	$1,342,080
Difference	-	$54,720 more

As you can see, adding the LMI to your loan in this scenario would cost you an additional $54,720 over the life of the loan. However, it reduces your upfront costs by $26,740.

Paying LMI upfront might be preferable if you:

• Have the cash available without depleting your emergency funds
• Want to minimise the total cost of your loan
• Prefer to start with a lower loan balance

 

Adding LMI to your loan might be better if you:

• Want to preserve your cash for other immediate expenses or investments
• Can't afford the upfront payment without financial strain
• Believe you can offset the additional cost through other investments or by making extra repayments later

 

Remember, this is a simplified example. Your actual costs may vary based on your specific loan terms, interest rates, and how long you keep the loan. Our mortgage brokers can discuss this with you during your consultation.

 

LMI Cost Estimates

To give you an idea of potential LMI costs, here's a table showing estimates for different property values and deposit sizes:

 

Property value	20% deposit (80% LVR)	15% deposit (85% LVR)	10% deposit (90% LVR)	5% deposit (95% LVR)
$500,000	$0	$6,266	$14,184	$17,028
$600,000	$0	$12,850	$22,835	$26,305
$700,000	$0	$17,350	$26,740	$30,797
$800,000	$0	$21,850	$31,900	$35,554
$900,000	$0	$26,350	$36,060	$40,080
$1,000,000	$0	$30,850	$40,135	$44,607

 

*Note: Each lender will calculate your LMI differently depending on a variety of factors.*

 

Who's eligible for an LMI waiver?

While Lenders Mortgage Insurance (LMI) is a common requirement for many borrowers with less than a 20% deposit, certain professionals may be eligible for an LMI waiver. This means they could potentially borrow up to 90% or even 95% of the property's value without incurring LMI costs, depending on the lender's policies.

The rationale behind these waivers is that professionals in certain fields are considered lower-risk borrowers due to their typically stable and high-income earning potential. However, it's important to note that eligibility criteria and specific policies can vary significantly between lenders.

The following professions may be eligible for an LMI waiver, depending on the lender:

·       Dentists, doctors, and surgeons

·       Pharmacists

·       Lawyers, solicitors, barristers

·       Financial advisers

·       Other medical staff (e.g., nurses, optometrists)

·       Veterinarians

·       Accountants

·       Engineers

·       Construction surveyors

It's worth noting that while these professions are commonly considered for LMI waivers, eligibility is not guaranteed. Lenders may have additional requirements, such as:

1.         Minimum income thresholds

2.         Professional association memberships

3.         Specific qualifications or years of experience

4.         Limits on the loan amount or property value

5.         Restrictions on the type of property (e.g., owner-occupied vs. investment)

Additionally, some lenders may offer reduced LMI premiums rather than complete waivers for eligible professionals.

How to get LMI waived

There are several strategies you can employ to potentially avoid paying Lenders Mortgage Insurance. Here are five key methods:

1. Get a guarantor

A family member (usually a parent) can use their property as security for your loan, effectively increasing your deposit in the eyes of the lender.

2. Apply through the Home Guarantee Scheme (HGS)

This government initiative helps eligible first-home buyers and single parents purchase a home with a smaller deposit without paying LMI. Key points include:

·       First Home Guarantee: For eligible first home buyers with as little as 5% deposit

o   From 1 July 2024 to 30 June 2025, 35,000 FHBG places are available. 

·       Family Home Guarantee: Helps eligible single parents with dependents to buy a home with as little as 2% deposit

·       Regional First Home Buyer Guarantee: Supports eligible first-home buyers in regional areas

3. Save a 20% deposit

While challenging, saving a 20% deposit is the most straightforward way to avoid LMI. It also reduces your loan amount and interest paid over time.

4. Compare lenders offering LMI discount offers

Some lenders offer special deals to reduce or waive LMI:

·       First-home buyer specials

·       Loyalty discounts for existing customers

·       Promotional offers during certain periods

5. Check if you're eligible for an LMI waiver based on your profession

As mentioned in the previous section, certain high-income professions may qualify for LMI waivers or significant discounts with some lenders.

Confused? A mortgage broker can help.

One of the most confusing aspects of LMI is that lenders each have different criteria and methods of charging the additional cost - some lenders have more competitive LMI costs than others. We know the LMI costs inside and out and can give you clarity on the LMI policies of specific lenders and banks.

 

We can assess your financial situation and property goals and give you an overview of the LMI charges you could incur. We can outline strategies that would see you purchase a property sooner, having to pay LMI or to wait until you have a larger deposit and avoid the cost.