Lenders Mortgage Insurance (LMI) Explained

What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance (LMI) is a type of insurance that protects the lender, not the borrower. It’s typically required when you borrow more than 80% of the property value, meaning you have less than a 20% deposit. In other words, if you don’t have a significant deposit to buy a property, LMI will be required to protect the lender from the risk of you defaulting on the loan.

How Does LMI Protect the Lender?

If you default on your loan and the property is sold for less than the remaining loan amount, LMI covers the difference, protecting the lender from financial loss. However, it’s important to note that LMI doesn’t protect you. As the borrower, you will still be responsible for repaying the loan, and the cost of LMI is typically passed on to you.

Although LMI policies can involve specific terms and calculations, the key benefit is that it enables borrowers with deposits under 20% to access home loans that would otherwise be out of reach.

Why is LMI Necessary for Borrowers?

LMI is a necessary component of the Australian lending system because it helps reduce the risk to lenders when they approve home loans for borrowers with smaller deposits. With the rising cost of housing, saving a 20% deposit can be difficult for many, particularly first-time homebuyers and those entering the property market with a lower deposit. LMI allows lenders to provide loans with less than 20% deposit, increasing your chances of securing the loan you need.

Why Do You Need LMI in Australia?

If you’re buying a home in Australia with less than a 20% deposit, Lenders Mortgage Insurance (LMI) is typically required by most lenders. But why is it necessary? Let’s break it down:

Loan-to-Value Ratio (LVR) and the 20% Deposit Rule

In Australia, the Loan-to-Value Ratio (LVR) is the percentage of your borrowing property. For example, if you’re buying a property worth $500,000 with a $400,000 loan, your LVR is 80% (since 80% of the property’s value is being borrowed).

• If your LVR is 80% or below, you won’t usually need LMI.
• However, if your LVR is higher than 80%, meaning you have less than 20% equity in the property, lenders will require you to pay LMI to cover the added risk of a higher loan.

The reason is simple: the higher the LVR, the greater the risk to the lender. If you can’t meet your repayments and your home is sold for less than you owe, the lender might suffer a financial loss. LMI protects the lender in case this happens.

Who Does LMI Benefit?

While LMI primarily protects the lender, it’s designed to help you, as the borrower, access home loans sooner, even if you don’t have a full 20% deposit saved up. Without LMI, many lenders may not approve loans for buyers with smaller deposits because of the perceived risk. LMI, therefore, opens up opportunities for:

• First-time homebuyers who might not have been able to save enough for a 20% deposit.
• Property investors who want to secure loans with a lower initial deposit but still want to invest in property.
• Borrowers who may be refinancing their current loans but need to borrow more than 80% of their home’s value.

When Is LMI Required?

Here are the everyday situations when you’ll need to pay for LMI:

• First Home Buyers: If you can’t save a full 20% deposit, LMI makes it possible to secure a home loan with a smaller deposit.
• Investors: Property investors who need to borrow more than 80% of the property’s value will usually have to pay LMI.
• Refinancing: If your loan and new LVR are over 80%, you must pay LMI.
• Top-ups: When increasing your loan balance, especially if it pushes your LVR above 80%, LMI may be required.

For first-time buyers, the cost of LMI may seem daunting, but it can be a worthwhile investment to enter the property market sooner rather than later. At Stryve Finance, we can help guide you through the process and find the best options for your situation.

How Does LMI Work?

Lenders Mortgage Insurance (LMI) protects the lender if you default on your home loan. But how does it work, and what does it mean for you as a borrower? Let’s take a closer look.

Who Pays for LMI?

While the lender purchases the LMI policy, you, the borrower, are responsible for paying the premium. The lender typically adds this cost to your loan balance as an upfront payment at settlement or by capitalising it into your loan.

• Upfront Payment: You pay the LMI premium in a lump sum at the time of your loan settlement.
• Capitalised (Added to Loan): The premium is added to your loan balance, and you repay it over the life of the loan, usually with interest.

Since the cost of LMI can be high, often thousands of dollars, depending on the size of your loan and deposit, some borrowers prefer the capitalised option as it spreads the payment over a long period. However, this means you’ll also be paying interest on the LMI.

How Is LMI Calculated?

The premium for LMI depends on several factors:

• The Size of Your Loan: Larger loans typically attract higher premiums.
• Your Deposit Size: The smaller your deposit (meaning the higher your LVR), the higher your LMI premium will be.
• Lender’s Policies: Different lenders may have varying LMI costs, as they work with different LMI insurers.

For example, if you’re purchasing a property worth $500,000 with a 10% deposit, you’ll need to borrow $450,000. The LMI premium for this loan could be anywhere from $5,000 to $10,000, depending on the lender and insurer.

Here’s a general guideline of how the LMI premium might vary:

• 10% Deposit (LVR 90%): The premium could be around 1–2% of the loan amount.
• 15% Deposit (LVR 85%): The premium could be between 1.5% to 3% of the loan amount.
• 20% Deposit: No LMI is generally required as your LVR is 80% or lower.

What Happens if I Default?

If you default on your loan and sell your property for less than the outstanding balance, the lender makes a claim on the LMI policy to recover the shortfall. For example, if your home is sold for $400,000 but your loan balance was $450,000, LMI would cover the $50,000 loss the lender incurs.

However, just because LMI covers the lender’s loss doesn’t mean you’re off the hook. If there’s any shortfall after the sale of the property, you, the borrower, are still liable for repaying the remaining balance, sometimes even to the insurer.

How Long Does LMI Last?

LMI generally lasts for the life of the loan. Once paid, it covers the lender for the duration of your mortgage, even if you refinance or restructure your loan. That means, as long as your LVR is above 80%, your lender is covered, and you’ll still need to pay the premium, either as part of your loan balance or upfront.

How Much Does LMI Cost?

Understanding how much Lenders Mortgage Insurance (LMI) costs is essential for anyone considering a home loan with less than a 20% deposit. The cost of LMI can vary greatly depending on several factors, including your loan size, deposit amount, and the lender’s policies. Let’s break it down.

Factors That Affect the Cost of LMI

The primary factors influencing the cost of LMI include:

1. Loan Amount: The larger your loan, the higher the LMI premium. This is because the insurer is taking on more risk if the loan amount is higher.
2. Deposit Size: The smaller your deposit (and therefore the higher your Loan-to-Value Ratio or LVR), the more expensive your LMI will be. This is because a smaller deposit means the lender has more risk exposure.
3. Lender’s LMI Insurer: Different lenders may work with different LMI insurers, and the cost of the premium may vary based on the insurer’s rates. Some lenders may also offer more competitive LMI deals.
4. Loan Type: The type of loan (fixed rate, variable rate, or interest-only) and its purpose (e.g., first-time homebuyer vs. investor) can also influence the LMI cost.

LMI Premium Calculation Example

Let’s take an example to understand how much you might pay for LMI based on your loan amount and deposit size:

Example:
Property Value: $500,000

Loan Amount: $450,000 (90% LVR, with a 10% deposit)

LMI Cost Estimate:

• For a loan of $450,000, your LMI premium might be around $5,000 to $10,000, depending on the lender and insurer.
• For someone borrowing $600,000 with a 10% deposit, the LMI cost could range from $7,000 to $12,000.

As you can see, the LMI cost increases with the loan size and decreases with a larger deposit.

What Does This Mean for Your Home Loan?

LMI can significantly cost your home loan, often running into the thousands of dollars. If you’re capitalising the LMI (i.e., adding it to your loan balance), the additional premium will increase the total loan amount and the interest you pay over time.

For example:

• Without LMI: You borrow $450,000, and your interest payments are based on that amount.
• With LMI: You borrow $455,000 (the loan amount plus the LMI premium), and your interest payments will be higher because your loan balance is now $455,000.

When LMI is capitalised into your loan, it increases your total loan balance. As a result, both your monthly repayments and total interest payable over the loan term will be higher.

How Can You Reduce the Cost of LMI?

There are a few strategies to help reduce the impact of LMI on your home loan:

1. Save a Larger Deposit: The more you can save for a deposit, the less you need to borrow, and the lower your LVR will be. This will reduce the LMI cost or help you avoid it entirely.
2. Shop Around for Lenders: Not all lenders offer the same LMI premiums. Working with a mortgage broker, like us at Stryve Finance, can help you compare the best deals and find a lender who offers lower LMI premiums.
3. Look for Low-Deposit Loan Products: Some lenders offer low-deposit loans that reduce the LMI premium or waive it altogether, especially for first-home buyers or those participating in government schemes.
4. Consider Guarantor Loans: A guarantor loan allows you to secure a home loan with less than a 20% deposit by having someone (usually a family member) act as a guarantor. This can help you avoid LMI altogether.

LMI Premium Range: How Much Will You Pay?

Here’s a rough idea of what LMI premiums might cost depending on your deposit size and loan amount:

While this table offers general estimates, your actual LMI premium will vary based on the specifics of your loan and lender.

Can I Avoid Paying LMI?

Many homebuyers and property investors are eager to avoid paying Lenders Mortgage Insurance (LMI), and fortunately, there are a few strategies that can help you reduce or eliminate LMI costs. While LMI is a standard requirement for loans with an LVR above 80%, there are ways to avoid it if you qualify.

1. Save a 20% Deposit

The most straightforward way to avoid LMI is by saving a 20% deposit. This will keep your LVR (Loan-to-Value Ratio) at 80% or lower, which means LMI is not required. While this can be a challenging goal for many homebuyers, it’s the most cost-effective method for avoiding the additional expense of LMI.

How to Save for a 20% Deposit:

• Start by setting a savings goal based on the home’s purchase price.
• Consider high-interest savings accounts or term deposits to grow your savings faster.
• Look into first home buyer schemes or government grants that might help you save or receive a deposit boost.

2. Use a Guarantor Loan

A guarantor loan allows you to avoid paying LMI by using someone else’s property as security for your loan. This is usually a family member who offers their property as additional security, allowing you to borrow more than 80% of the property’s value without paying for LMI.

How Does a Guarantor Loan Work?

• The guarantor provides their property as collateral to reduce the lender’s risk.
• Your LVR is effectively reduced, and you can borrow more with a smaller deposit (typically 5–10%).
• Since the lender has additional security, LMI isn’t required.

While this option can be a great way to avoid LMI, it’s essential to understand that the guarantor’s property is at risk if you default on your loan. This is a significant commitment for your family members.

3. Look for Low-Deposit Home Loan Options

Some lenders offer low-deposit home loans that reduce or waive LMI for borrowers with a smaller deposit. These loans often have more relaxed lending criteria, but they usually come with specific requirements, such as:

• A strong credit history or high income.
• First home buyer status (in some cases).
• Participation in government schemes like the First Home Loan Deposit Scheme.

These loans are designed for borrowers who may not have the full 20% deposit but still meet the lender’s criteria for lower risk.

4. Government Schemes for First-Time Homebuyers

Australia offers several government schemes that can help first-time homebuyers purchase a property with a smaller deposit and sometimes avoid paying LMI.

Key Government Schemes:

• First Home Loan Deposit Scheme (FHLDS): The Australian government will guarantee up to 15% of your deposit to help you secure a home loan with as little as a 5% deposit. This means you don’t need to pay LMI.
• First Home Super Saver Scheme (FHSSS): This scheme allows first-time buyers to save for a deposit within their superannuation fund, providing tax benefits and potentially a larger deposit.
• First Home Owner Grant (FHOG): A state government initiative that provides a one-off grant to help first-time buyers cover some of the costs of purchasing their first home. The amount of the grant varies by state.

These schemes can help you secure a home loan without needing LMI, but eligibility requirements vary. It’s essential to check the specific criteria for each scheme to see if you qualify.

5. Consider a Shared Equity Loan

A shared equity loan is another option. In this type of loan, you can share the cost of purchasing a home with a government body or private investor. In exchange, the government or investor takes a portion of the property’s equity.

• This can allow you to purchase a home with a lower deposit.
• Often, shared equity loans don’t require LMI, as the risk is shared between you and the investor.

These loans are typically available to first-time homebuyers and may have specific eligibility criteria.

Pros and Cons of LMI

Like any aspect of home financing, Lenders Mortgage Insurance (LMI) has advantages and disadvantages. Understanding these will help you weigh the cost of LMI against its benefits in securing your home loan. Let’s explore both sides to give you a clearer picture.

Pros of LMI

1. Get into the Property Market Sooner

   The most significant advantage of LMI is that it allows you to enter the property market sooner. Without LMI, you typically need a 20% deposit to secure a loan. With LMI, however, you can get a loan with as little as 5% to 10% deposit, which means you don’t have to wait as long to save for a larger deposit.

   First-time homebuyers and property investors can take advantage of this opportunity and buy their dream home or investment property earlier than expected.

2. No Need for a Guarantor

   This is a viable option for some borrowers, especially those with family members willing to act as guarantors. However, with LMI, there’s no need to involve your family in securing your loan. You can secure the loan without putting someone else’s property on the line.

   This provides greater independence and peace of mind, especially if you don’t want to burden family members.

3. Allows Low-Deposit Borrowing

   For many borrowers struggling to save for a full 20% deposit, LMI offers a chance to borrow more while lowering the deposit. This can be crucial in a competitive housing market, where prices rise faster than many people can save.

   Lower deposit requirements make it easier for individuals or couples to purchase homes sooner, especially for first-time buyers.

Cons of LMI

1. It’s Expensive

   The most obvious downside of LMI is the cost. Depending on your loan size, deposit amount, and lender, LMI can run into the thousands of dollars. For example, a $500,000 loan with a 10% deposit could cost between $5,000 and $10,000, or even more.

   Capitalising the cost (i.e., adding it to your loan balance) means you’ll also be paying interest on the LMI, which increases the overall cost of your home loan.

2. Doesn’t Protect the Borrower

   While LMI protects the lender if you default on the loan, it doesn’t protect you as the borrower. If your home is sold for less than the loan balance, and LMI is used, you’ll still be responsible for the remaining shortfall. You could be liable for the difference, even after the LMI payout.

   LMI doesn’t offer the same protections as mortgage protection insurance, which is designed to protect you in case of job loss, illness, or other financial setbacks.

3. It’s Not Refundable

   Unlike some other types of insurance, LMI is non-refundable. Even if you repay your loan early or refinance, you won’t be able to get your LMI premium back. If you pay off your loan quicker than anticipated, this can feel like a waste.

   Once the LMI premium is paid, it’s gone, and you won’t receive a refund.

4. Can Increase Your Loan Balance and Repayments

   If the cost of LMI is capitalised into your loan, it will increase your loan balance and consequently, your monthly repayments. Over the life of the loan, this could also result in you paying more interest since the amount you owe is now higher.

   If LMI is added to the loan and not paid upfront, you may pay more each month, which could stretch your budget further.

Tips from a Mortgage Broker at Stryve Finance

Navigating the complexities of Lenders Mortgage Insurance (LMI) can be challenging, especially if you’re a first-time homebuyer or an investor trying to understand how it impacts your finances. As mortgage brokers at Stryve Finance, we’re here to simplify the process and provide expert advice to help you make informed decisions.

Compare LMI Across Lenders

Not all lenders offer the same LMI premiums or terms. Some lenders may have more competitive rates than others, and the cost of LMI can vary significantly. At Stryve Finance, we help you compare LMI costs across multiple lenders to ensure you get the best deal possible. We aim to help you minimise your LMI premium while securing the best loan terms.

Why This Matters: LMI premiums can add thousands of dollars to your home loan. Choosing a lender with lower LMI costs can reduce your overall expenses.

Some lenders might offer discounts on LMI or special deals for certain loans, such as first home buyer loans or low-deposit loans.

Understand Your LMI Options and Terms

Different lenders have different LMI policies. It’s crucial to understand the terms tied to your loan. Some lenders allow you to capitalise the LMI (add it to your loan balance), while others may require an upfront payment.

Questions to ask about payment options include:

• Can the LMI be capitalised or paid upfront?
• How will the LMI affect my monthly repayments?
• Is there flexibility in repaying the LMI premium?

Our team at Stryve Finance can help you understand these terms and choose the most suitable payment option for your financial situation.

Explore Ways to Minimise LMI Costs

While LMI is an added cost, you can minimise its impact. Strategies include:

Save a Larger Deposit: Reduces your LVR, leading to a lower LMI premium or eliminating it entirely.Use a Guarantor: Having a family member act as a guarantor can let you avoid LMI completely.Consider Government Schemes: Programs like the First Home Loan Deposit Scheme can help first-home buyers avoid LMI.

Look for LMI Waivers or Reductions

Some lenders offer LMI waivers or discounts for specific applicants, such as first-time homebuyers, professionals (e.g., teachers, doctors), or employer-sponsored buyers.

Why This Matters:

• Waivers or reductions can save you thousands of dollars in upfront costs.
• Some lenders offer no-LMI loans with low deposit requirements — always worth asking about.

Ensure You Understand the Risks of LMI

While LMI helps you buy with a smaller deposit, remember that LMI only protects the lender, not you. If your property sells for less than the loan balance, the lender can claim the shortfall from the LMI insurer. You may still need to repay any remaining debt.

Why This Matters:

• Understanding the risks helps you make better decisions about your loan and insurance.
• Ensure you’re comfortable with long-term obligations if your property value drops and you owe more than the sale price.

Work with an Expert Mortgage Broker

Navigating LMI and home loans can be complex. At Stryve Finance, we:

• Help you understand LMI costs and loan structures.
• Guide you on how to minimise or avoid LMI using schemes, guarantor options, or alternative lenders.
• Provide personalised advice to secure the right lender and terms for your financial situation.

With our help, you can make informed decisions, reduce your LMI costs, and secure the best home loan possible.