What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) is a one-off payment which lenders require you (the borrower) to pay to protect them (the lender) against the unfortunate event where you (the borrower) might fail to make your home loan repayments. This is required generally when you need to borrow more than 80% of the value of the property.
For example, if you're looking to purchase a property for $600,000 and have saved a deposit of $100,000, you'll require to borrow around $530,000 to cover the purchase and cost (generally 5% of purchase price). This represents a loan to value ratio(LVR) of 88.34%($530,000/ $600,000). The lender will require you to pay Lenders Mortgage Insurance.
How much does it cost?
The cost of LMI will depend on:
Loan Size - How much you're borrowing
LVR - Your loan to value ratio will affect the insurance premium as a loan or 85% will generally cost less then taking a loan of 90%
Lender - LMI premium can vary between lenders. Using the above example, the LMI from different lenders can range from $9,500 to $13,500
How does it benefit me?
Before lenders' mortgage insurance was available, lenders usually required a deposit of around 20% in order for you to apply for a loan. This was to guard against the risk of the property being sold at a price less than the outstanding amount of the loan. LMI have allowed lenders to mitigate this risk. For the borrower, it may mean:
Lower deposit required meaning you are able to purchase a home much earlier, or buy a better property, than they would otherwise have been able to afford before lenders' mortgage insurance.
If you do have a deposit of 20% or more, then you have the choice of whether to borrow more, using your available funds for other priorities such as furnishings or renovations.
For property investors, lenders' mortgage insurance allows borrowers to have higher borrowing ratios, giving them the opportunity to maximise negative gearing benefits.
Can I Avoid LMI?
Yes! You can:
Save a larger Deposit - The first way to avoid paying LMI is to save enough money upfront for a deposit so it isn’t required. In most cases, this will mean saving a deposit of at least 20% of the value of the property, as well as saving the additional money to meet other fees and charges. This can be very challenging for first home buyers and delaying your purchase – not always an option.
Guarantor Loan - Another option to avoid LMI is to find someone willing to be a guarantor on your loan. There are other consideration to this which we'll explore in our next blog.
LMI Waiver - An alternative is to seek out a lender who doesn’t charge LMI. Some lenders provide LMI Waiver for certain Industry Professionals up to 90%