What Is Lenders' Mortgage Insurance (LMI)?

Lenders' Mortgage Insurance is often confused with Mortgage Protection Insurance. Mortgage Protection Insurance insures the borrowers and can cover mortgage repayments in the event of unanticipated circumstances such as unemployment, injury, illness or death.

LMI means that even with a small deposit, you have the potential to own your home sooner. According to Mortgage Choice’s annual Future First Homebuyer Survey, 72% of prospective first home owners aim to purchase within two years of their decision to enter the market. While this is a fantastic goal, being able to save $80,000 (for a prospective $400,000 loan) can be a daunting task.

LMI allows the lender to have confidence in offering you a home loan, even if you haven’t quite reached that 20% deposit. With LMI in place, some lenders will allow you to borrow up to 95% of the purchase price of your home.

Talk to a Mortgage Choice broker today to get started on your home loan journey. You may be able to buy your new home sooner than you think. Our home loan experts will evaluate your individual savings situation and help set you on the path to your home ownership goals.

The cost of LMI can vary depending on the percentage of the property value borrowed and the loan amount. The premium can also vary depending on whether your contribution is made up of genuine savings or has come from other sources, such as a gift.

For these reasons, an accurate cost of LMI cannot be given until a property and lender have been selected, and could be a flat fee of up to thousands of dollars.

The LMI premium is a one-off, non-refundable fee which is paid at loan settlement. For most lenders, the LMI fee can be included in the loan amount. If the LMI is added into the home loan amount, the borrower will pay interest on the total loan and it will increase the minimum monthly loan repayments.

LMI is arranged by the lender, not the borrower, although the borrower pays for it. Each lender has their own policy regarding when LMI is required and how much it will cost. If a borrower refinances their loan, the premium is not transferable. If LMI is required on the new loan, a new premium must be paid.

One method to avoid paying LMI is to save up the minimum deposit for the property purchase. Alternatively, if your deposit is less than 20% but you have a guarantor for the property loan, you may be able to avoid paying LMI. Your guarantor can assist by providing additional security which reduces the LVR to 80% and therefore enables you to avoid paying LMI.

The answer to this question will vary depending on your individual circumstances and goals. Your Mortgage Choice broker can discuss your options with you and help you run the calculations to reach an informed decision.

You may have to reassess your budget or the loan amount

LMI can account for a sizeable chunk of your home loan, and if you need to absorb this cost into the loan, you may need to assess your target budgets for your home purchase. Your mortgage broker will help you tally up all the costs involved so that you have an accurate idea of how much money you’ll have to spend on your property purchase.

The loan approval process may be more difficult and take longer

Qualifying for LMI means passing an insurance company’s qualification guidelines as well as a lender’s home loan application criteria. Because it is actually the mortgage insurance company taking the risk on your home loan, they may have stricter criteria for granting approval.

Obtaining LMI approval can also extend the entire home loan application process. You mortgage broker will be able to identify not only your likelihood of LMI approval, but also the length of time the application may take. Your broker will be able to suggest different lenders and home loans to help you meet any relevant requirements to get the loan approved faster.

LMI is calculated as a percentage of the loan amount and your LMI will vary depending on your Loan to Value Ratio (LVR) as well as the amount of money you wish to borrow.

The percentage you’re required to pay increases as the LVR and loan amount increase, and usually goes up in stages.

Lenders' Mortgage Insurance costs differ depending on the loan, lender and the LMI provider. The factors that determine the cost of your LMI can also include:

• Whether your property is owner occupied or not - it is believed that you are less likely to default on a loan if the property is also your residence.
• If you are self employed or paid as a PAYG employee.
• Whether or not you have genuine savings.
• Whether or not you are applying for the First Home Owner Grant (FHOG).

Stamp duty and GST are both payable on Lenders' Mortgage Insurance and these are generally included in the total quoted price for your LMI. Please note that this stamp duty is different to the stamp duty payable when purchasing a property.

Our expert mortgage brokers will explain and work with you through all of these taxes and fees so you understand how your LMI will impact your home loan.

Even if your Loan to Value Ratio (LVR) is over 80%, your LMI could be waived if you meet some specific conditions. While these are rare and have strict qualifiers, if you are able to prove that you meet the conditions, you could have the opportunity to either receive a discount on your LMI or even have the LMI waived.

This is examined on a case-by-case basis, but some of the conditions could include:

• The LVR is only slightly over the 80% threshold
• No LMI payable for loans up to 90% LVR for certain professions
• Your lender has an internal LMI substitute

For most applicants, the maximum LVR before LMI needs to be paid is 80%. However for certain professions, LMI may be waived for LVRs up to 90% and are assessed on an individual basis.

These professions include:

• Medical professionals: doctors, dentists, veterinarians, optometrists
• Lawyers, solicitors and barristers

(Note that you will also need to be a member of specific associations for your profession)

An expert mortgage broker can tell you whether you are eligible for LMI exemption or discount.

Whilst most lenders generally rely on lenders mortgage insurance if the LVR is above 80%, some lenders have created their own alternative (and often internal) risk process. In these cases, the lender will charge a one off ‘risk fee’ as an alternative to LMI.

There are several advantages to a risk fee:

• The fee is often less than the standard LMI for that loan amount
• There are no insurance taxes to be paid as a 'risk fee' is not an insurance cover. These savings are generally passed on to the applicant

Lenders that waive LMI in favour of their own risk fee (also called Reduced Equity Fee – REF or Low Deposit Premium – LDP) have the ability to keep the loan process internal using their own policies.

Risk fees will normally also apply to non-traditional loans, for example those borrowers who have had past credit issues. These may be payable regardless of LVR.

If you would like to explore LMI alternatives and find out if you are eligible, contact us today to speak with one of our expert mortgage brokers who will assess your individual situation and provide you with tailored advice.

Unfortunately LMI is generally not transferable if you refinance your loan with a different lender. For each new loan , your lender will look at your loan to value ratio and you will generally be required to pay LMI if your LVR is considered to be a high risk. Have a look at our LVR calculator page to find out under what situations the LVR is considered a higher risk

Even if you haven’t made enough repayments to have an LVR over 80%, your equity can still increase if your property value has gone up with the market. Your broker will take this into account when assessing whether you will need to pay for LMI again.

The same is to be said if you are looking to purchase your next home – if you have not yet built up enough equity in your existing property, you may have to pay LMI to finance your new property home loan.

To find out if you will need to pay LMI, or if a broker can help you avoid paying LMI in your refinance, contact one of our home loan experts today.