Co-author: Christine Thelander
Lender’s Mortgage Insurance is a condition of home loan borrowing where your mortgage lender may require you to make a one-off payment to protect them (the lender) against the event where you (the borrower) might fail to make your home loan repayments.
While many people believe that mortgage loan insurance is designed to protect the borrower in case of loan default – which is actually mortgage protection insurance, a different product entirely. The true purpose of LMI is to protect the lender. This article explains Lender’s Mortgage Insurance or LMI in more detail.
The table below displays a snapshot of 5-Star variable rate home loan products available for first home buyers on Canstar’s database, with links to providers’ websites. The table is sorted by provider name (alphabetically).
The products and Star Ratings displayed are based on a loan amount of $350,000 in NSW at 80% LVR and available for Principal and interest repayments. Read the Comparison Rate Warning.
What is Lender’s Mortgage Insurance (LMI) and how does it work?
Lender’s Mortgage Insurance is an insurance policy that protects the lender from financial loss if the borrower can’t afford to meet their home loan repayments.
Under the terms that are included in most LMI policies, a financial institution can make a claim if the borrower defaults on the loan, and the sale of the property doesn’t equal the value of the mortgage. It might seem that there is a benefit to the borrower from LMI, but by reducing the risk to the lender, LMI allows them to lend larger amounts and approve more home loan applications.
Lenders mortgage insurance is applied directly to your home loan when it applies, so it’s not technically an upfront fee – but you still pay for it. How do you know LMI applies to you?
When is lenders mortgage insurance required?
Generally a lender will require you to pay for a lender’s mortgage insurance policy if your home loan deposit is less than 20% of the total value of your mortgage – however individual lenders may require more or less than a 20% deposit in order to avoid paying LMI.
This means that if you’re looking to avoid paying LMI, you may be better off not entering the housing market just yet, and waiting for a few years (or however long it takes) for you to save the 20% deposit required to avoid paying LMI.
What affects the cost of lender’s mortgage loan insurance?
There are a few things that affect the cost of LMI. These include:
- The size of the loan you want
- The amount of deposit you have
- Whether the property is for investment or to live in
- Are you a full-time or casual employee?
- The insurer used by the financial institution
1. The size of loan you want
The greater the amount of money you are borrowing, the greater the potential loss of the financial institution in the event that you default. Hence the bigger your loan, the higher the cost of insuring against it.
2. The amount of deposit you have
Canstar research has found the deposit you can raise will impact the interest rate offered to you by the bank, but it will also affect how much LMI you have to pay, if any.
A number of home loan products and providers will lend up to 95% of the property value, whereas standard home loans typically require a deposit of 20%, and low doc home loans may require a deposit between 20% and 40% of the property’s value. There are even a very small number of no deposit home loan products out there.
The smaller the deposit you have though, the higher the cost of LMI. For more information on how your deposit affects interest rates and LMI costs for first home buyers, read this article.
3. Whether the property is for investment or to live in
Not all financial institutions will differentiate between an investment and residential property purchase when it comes to LMI, but some will.
4. Full-time or casual?
Your employment status can also affect the perceived risk of lending to you, so this is another factor that might affect your LMI premium.
5. The insurer used by the financial institution
There are several providers of lenders mortgage insurance and, just like any other insurance product, premiums can differ between institutions.
Helen and Joe Tollan
Helen and Joe Tollan discovered they owed $87,000 to QBE LMI when they defaulted on a loan 5 years ago.
“We just thought if they took your property … your money is already paid,” Ms Tollan told the 7.30 Report.
They managed to avoid bankruptcy, but have reached an agreement to pay back QBE LMI $450/week for the next 5 years.
Source: ABC News
What does Lenders Mortgage Insurance Cost?
According to the Genworth LMI calculator, if you paid a 5% deposit on a $300,000 loan, it would cost $7,610 in insurance. Lender’s Mortgage Insurance premiums or rates are dependent on the deposit amount, the cost of the property and your risk assessment as a borrower, among other things.
There are plenty of things that affect the cost of lender’s mortgage insurance. To give you an idea of the cost, we’ve used the LMI calculator available through one of Australia’s largest lender’s mortgage insurance providers, Genworth, to give you some hypothetical ‘ballpark’ type calculations for a first home borrower in NSW, based on different deposit amounts (different LVRs).
|How much is Lender’s Mortgage Insurance?|
|Cost of property||5% deposit||10% deposit||15% deposit|
Source: Quotes taken from Genworth LMI calculator, correct as at 25 January 2018. Premiums listed are for first home buyers to a loan term of up to 30 years.
As you can see from the above, lender’s mortgage insurance can be a hefty price; it’s worth looking for some strategies to avoid the cost, if at all possible. See below for our tips on avoiding LMI.
How to avoid LMI
Can I avoid LMI? Yes, in many circumstances it is possible to avoid paying lenders mortgage insurance. Here are 5 of the most common ways you might be able to avoid LMI:
- Grow your deposit to20% or more
- Ask your parents to chip in
- Get them to go guarantor
- Get a quote upfront
- Let the lender know your application
1. Grow your deposit
To avoid lender’s mortgage insurance, a deposit of 20% or more of the property purchase price is typically needed. Weigh up the pros and cons of giving yourself more time to save, compared to getting into the property market earlier.
If you need a savings kick-start, check out some of the following articles Canstar has written on the subject:
- 10 Ways To Save For A Home Deposit
- 7 Ways To Save For A Deposit If You’re Self-Employed
- 70 Easy Ways To Save Money
A good savings account is also a great way to save money for that all-important deposit.
2. Ask your parents to chip in
A cash gift from your parents could be enough to get you over the line and avoid LMI – however, this does come with financial risk for parents. Note that some financial institutions are unwilling to accept cash from a third party as genuine deposit savings, but some will allow you to avoid LMI with this strategy.
3. Have a family member go guarantor
A guarantor is someone who guarantees part or all of your loan so that in the event that you can’t pay, the responsibility would fall to them. This eliminates much of the risk for a lender but places a great deal of risk on the person or people acting as the guarantor, so it is not a decision that should be taken lightly. After all, the person going guarantor is potentially risking their own savings and assets.
You can read more about going guarantor on a home loan here. Since it is a major decision to make, it is a good idea to seek professional advice on the matter before making a decision. Guarantors are often family members in reality, and it can be tricky mixing money matters with family.
4. Get a quote upfront
As already mentioned, the cost of LMI can differ between financial institutions. The two main providers of LMI in the Australian market are Genworth and QBE.
Outside of that though, some institutions will self-insure for deals up to a certain loan-to-value ratio (LVR). Feel free to ask a few financial institutions, before you being the home loan application process, for an estimated cost of LMI. It could potentially differ by thousands of dollars between providers.
5. Let the lender know your occupation
Some occupations are viewed by lenders as being at less of a risk of redundancy or job loss. So if you are an engineer, accountant, lawyer, or medical practitioner (or any occupation in the list quoted in this article), let your lender know during the application process, and ask them to consider waiving the LMI premiums.
Lender’s mortgage insurance can be a huge cost – it’s worth learning about it and doing some research, as it could save you thousands. Make sure you find out how much LMI you would pay on any loan you are considering, before signing up to add LMI to your home loan debt.
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