What is LMI (Lender's mortgage insurance)? How much does it cost and when will I have to pay it?
Saving for a home is no mean feat, and getting your deposit together is just the beginning. Once you’ve saved up your deposit amount, there are other costs to factor in before you can step onto the property ladder. Depending on the size of your deposit, you may have to add LMI to this list of costs.
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➡️ What is LMI (Lenders mortgage insurance)? 0:19
It’s short for lenders mortgage insurance. It’s an insurance policy that protects the lender from financial loss if the borrower can’t afford to meet their home loan repayments.
LMI is often confused with Mortgage Protection Insurance. Contrary to popular beliefs, LMI is not designed to protect the borrower if they default on their loan repayments. Borrowers may bear the cost of LMI, but its purpose is to reduce the risk for lenders.
➡️ When is LMI needed? 0:47
Generally you’ll have to pay for LMI if your home loan deposit is less than 20% of the total value of your property – or in other words your LVR is more than 80%.
➡️ How is LMI paid? 0:58
If your lender requires you to take out LMI, usually it can be paid upfront as a one-off payment as part of the settlement process. Alternatively, it can be capitalised, or in other words, added to your total home loan amount.
If the LMI amount is added into your loan, you’ll generally be charged interest on it, along with the rest of your loan.
➡️ How is LMI calculated? 1:24
LMI is a percentage of your loan amount. This percentage varies depending on how much you’ve borrowed and your LVR.
The bigger your loan, the higher the cost of the insurance. This accounts for the potential loss to the lender in the event that you default on your loan.
For example, if a first home buyer decides to take out an owner occupier home loan, with a 5% deposit on a property valued at $400 000 over a loan term of up to 30 years, they would pay approximately $11,897 in LMI.
In comparison, the same borrower with a 15% deposit, would pay about $3,770 in LMI.
➡️ There are other factors that may also affect the cost of LMI. 2:12
Some financial institutions and insurers may charge different LMI costs for investment and residential property purchases.
Employment status can impact how risky the lender considers the borrower to be, which might affect the LMI premium.
Lastly, there are several providers of LMI and, just like any other insurance product, premiums can differ between institutions
➡️ Do I have to pay LMI again if I refinance or buy my next home? 2:39
LMI premiums are typically non-refundable. If you switch your loan to another provider in the future, you generally won’t be able to transfer your LMI to another lender.
In some circumstances, borrowers may have to pay for a new policy through the new lender.
➡️ Can I avoid paying LMI? 2:54
If you’re looking to avoid paying LMI but you don’t have a big enough deposit saved up, you may be better off pressing pause on your home ownership dreams for now, and waiting until you’ve saved up the 20% deposit generally required to avoid paying LMI.
If you do wish to get into the market sooner and with a smaller deposit, you could consider applying for the Federal Government’s First Home Loan Deposit Scheme. Under this scheme, 10,000 eligible first home buyers can purchase a modest home with a deposit of as little as 5%.
Buying a home is not a decision to enter into lightly. It’s important to know what you’re getting into. Speaking to a qualified adviser, doing relevant research and running the numbers will help you make an informed decision that best suits your personal circumstances and money goals.
Helpful links from this video:
⭐ Lender's mortgage insurance (LMI): How much is it? https://bit.ly/2N8gPLs
⭐ Where can borrowers find a discount on lenders mortgage insurance? https://bit.ly/3cZsMhw
⭐ What is the First Home Loan Deposit Scheme? https://bit.ly/36XAnsW
⭐ What is LVR (loan to value ratio)? https://bit.ly/2MOoNJK
⭐ Find out your credit score: https://bit.ly/3mEv32J
Important information:
This advice is general and has not taken into account your objectives, financial situation or needs. Consider whether this advice is right for you. Consider the product disclosure statement before making a purchase decision. Canstar provides an information service. It is not a credit provider, and in giving you information about credit products Canstar is not making any suggestion or recommendation to you about a particular credit product.
See Canstar’s FSCG: https://www.canstar.com.au/canstar-fs...
Research provided by Canstar Research AFSL and Australian Credit Licence No. 437917.
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