Lenders Mortgage Insurance (LMI) EXPLAINED - 8 things you need to know about LMI
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) is an insurance premium which protects lenders, not borrowers, in the event that borrowers default on their mortgage. If default occurs, the lender may sell the borrower’s property, and if the proceeds from the selling cannot cover the debt the borrower owes, the lender will claim the shortfall from the insurer.
How does LMI work?
LMI is a one-off payment, payable at settlement. This premium can be and normally will be added into the total loan amount. The payment is not refundable, nor transferable in most cases. Therefore, if you want to refinance your home loan in a few years and the loan to value ratio on your home loan is still over 80%, then another LMI payment will need to be made at settlement of the refinance. LMI is only applicable when the borrower has not saved up a certain percentage of the property purchase price for the deposit of a home.
Why do borrowers pay for LMI?
Though it may sound costly, it is still the most popular, and for some, the only, way to achieve home ownership sooner if the borrower does not have a large amount of savings for a deposit. It is not uncommon that by paying LMI, one may reach the dream of home ownership five years earlier! LMI enables borrowers to save only 5-10% deposit as opposed to 20%+ in order to buy their own home. This helps them get onto the property ladder faster without having to wait a few more years to buy.
Saving for a home loan is hard and there are many different options available for borrowers for different purposes. Lenders mortgage insurance helps borrowers achieve their goals quicker at a cost. It is a viable option but needs to be considered carefully as in the long term borrowers pay more in interest (because they have to borrow the LMI amount).
How much deposit do I need to have in order to avoid LMI?
In most cases, when borrowers have a deposit of 20% of the property price plus all associated costs (stamp duty, solicitor fees, government charges, and lender/bank fees), they do not need to pay LMI. There are situations that lenders may ask for LMI from 70% LVR, and there are also scenarios that borrowers only need to pay LMI only if they borrow more than 90% LVR.
How much does lenders mortgage insurance (LMI) cost?
LMI cost depends on a few factors such as:
- the total loan amount
- Loan to value ratio
- loan purpose
- whether you are a first home buyer.
Typically, LMI ranges from 0.4% to 4.6% of the loan amount. Overall, higher loan to value ratio, the higher the LMI charged.
For one example, if a first home borrower is going to buy a property valued at $500,000 with 10% deposit plus costs, with one of the big four banks, his LMI will approximately be $12,304, or 2.73%. So the borrower’s total loan amount would be 90% of the property $450,000 plus LMI $12,304, which is totaled at $462,304. With the LMI payment being paid and added into the loan, the borrower is now going to own the first home sooner instead of saving another 10% deposit.
Are there any differences when applying for a home loan with LMI?
How can I avoid paying for LMI when I am borrowing 90% LVR?
A few professions will be eligible for an “LMI waiver” if the LVR is not higher than 90%. Among these, there are doctors, medical professionals, accountants, and lawyers. Different lenders have different policies regarding the LMI waiver. Some lenders may have a long list of professions while others may not have this policy at all. Some may have lenient requirements for certain professions while others require a minimum gross taxable income. It is best to speak with and enquire with a mortgage broker like Reservoir Finance who can help you navigate the different lending policies in order to find one that may be willing to waive the LMI.
How can a mortgage broker help me avoid or lower the LMI cost?
Professional mortgage brokers have access to over 40 lenders. The key role for a mortgage broker is not only going to help you get a loan in your best interest, but also going to help you find an LMI at the lowest cost.
Reservoir Finance is an independent mortgage broker based in Sydney and we pride ourselves in putting our customer needs and goals first, over and above the need to “close the deal”. We work with a unique philosophy of responsible borrowing where we might not always encourage you to borrow to your maximum borrowing capacity if your personal circumstances might be stretched. We are honest, transparent and upfront with you throughout the entire process.
Contact us today for an obligation free assessment of your personal circumstances and goals. We are also proud that 99% of our clients are not charged any mortgage broker fees by us. Fill out the form below or call us on (02) 9261 8994. We would love to help you out!