Lenders’ Mortgage Insurance (LMI) is a common insurance product taken out by a lender against borrowers electing to use them for a home loan.
LMI mitigates the risk of that lender losing their money in the event that the borrower defaults on their loan. It can either be paid as an upfront, one-off fee or as an additional fee on top of monthly repayments.
However, whether the lender will require you to pay LMI is dependent on a few things, such as the deposit size, property value and purchase price.
Here’s what you need to know.
What is LMI Used For?
Lenders’ Mortgage Insurance might sound like it’s just an extra cost, but it can be useful for a range of different reasons, both for borrowers and lenders.
Lenders’ Mortgage Insurance is useful for borrowers with a high Loan to Value Ratio (LVR), as this is a crucial factor in determining eligibility for home loans.
Your LVR is calculated by taking the loan amount and dividing it by the value of the property, and then expressed in a percentage.
Here’s what an example of LVR could look like:
- You’ve found the perfect property at $950,000
- You have a $150,000 deposit already
- So you’d need to borrow $800,000 to secure your dream home
Your potential lender would calculate your LVR using the following equation:
Amount to borrow ÷ property value = LVR percentage
So in our example, that would look like this:
$800000 ÷ $950,000 = 84%
Getting a home loan isn’t quite as simplified as that, as there would also be additional fees and costs involved in purchasing.
But knowing how to calculate your LVR can give you insight into what yours might be, and whether that would be good news for potential mortgage insurance lenders.
Lenders typically prefer loans with an LVR of 80% or less as they perceive
these loans as lower risk. Reducing the risk for lenders means borrowers who have a lower income or higher LVR have a better chance of being approved for a home loan. So, if you could save for a 20% deposit, LMI is not applicable generally.
But if you aren’t able to save up to 20% and opportunity becomes available to purchase a property, LMI could be a way for you to get into the property market quicker.
Lenders’ Mortgage Insurance is useful to the banks given the level of protection it allows a lender. It reduces the risk involved for them, which gives you a higher chance of being approved for a home loan.
Borrowers with higher LVR have less equity in the property (under 10%), and therefore less of a financial stake, and less to lose in the eyes of the lender.
LMI helps alleviate some of this risk to the lenders by ensuring that, in the event of a default from the borrower, the lender would be able to recoup some of the loss.
Will I Need to Pay Lenders’ Mortgage Insurance? How Much Will it Cost Me?
LMI is required for those with high LVR and a deposit of less than 20%. So if that sounds like your situation, it’s highly likely you’ll need to pay LMI.
That’s not a bad thing, if it allows you to get into your property sooner. A good way to look at it is that it allows your lender to feel insured against your risk profile, similar to how you as a borrower might pay mortgage protection insurance.
LMI is not the same as mortgage protection insurance (MPI). MPI is a form of insurance available to some customers, which you might also be looking at. MPI can be applied to your home loan similar to how personal loan insurance works, in that it provides mortgage insurance for borrowers if the alternative is defaulting on mortgage repayments.
This can be a highly useful safeguard for borrowers against unfortunate events if they occur – just like LMI is for lenders.
However, mortgage protection insurance is paid each month, while Lenders’ Mortgage Insurance is a one-time payment by you at the time of settlement or added to the loan and paid alongside repayments.
When it comes to Lenders’ Mortgage Insurance costs, it varies depending on the lender, the loan product, and your credit score.
Can I Do Anything to Avoid Paying LMI?
It’s also worth noting that some lenders may offer ‘LMI-free’ loans, which allow borrowers with high LTVs to avoid paying Lenders’ Mortgage Insurance.
However, these loans typically come with higher interest rates, which can make them more expensive overall.
Ideally, if you want to avoid paying LMI, the best way to do this is by meeting the 20% deposit requirement. Reaching that benchmark will help your potential lenders see you as a less risky borrower, and also help you avoid paying extra on your mortgage.
Another way to avoid paying LMI is by asking someone to be your guarantor. Having a guarantor on your home loan gives lenders that extra security against potential mortgage defaults, as the guarantor will then become responsible for making loan repayments.
If you choose to use a guarantor, they’ll need to meet certain credit score levels, equity and income requirements. And if you’re unable to obtain a guarantor, you can also look at a more affordable property within your budget.
Lenders’ Mortgage Insurance isn’t just an extra cost that exists to make your life harder. It’s the most effective way for a lender to protect themselves in the event of a borrower defaulting on their mortgage loan.
If you have a high loan-to-value ratio (LVR), you’ll likely be required to pay the LMI premium, which is typically included as an additional monthly amount to home loan repayments but can also be paid upfront.
LMI helps not only the lender, but the borrower too. It can be really effective in helping people get into the housing market quicker, as it can help you avoid needing to save over 20% for your home loan deposit.
If you’ve calculated your LVR and think you’ll be required to pay LMI, it’s important to understand the cost and the impact of that on your mortgage loan. Compare all your options with different lenders before making a decision.
For professional support, schedule an appointment with one of our brokers today to find out more about Lenders’ Mortgage Insurance.