If you are low on a deposit, then it's likely you'll hear the term Lenders Mortgage Insurance, commonly referred to as LMI, a lot when shopping around for home loans. Here we explain what LMI is, how it’s calculated, and how you can avoid paying it.
Lenders Mortgage Insurance (LMI) is a fee charged by home loan lenders. It is typically required by a lender if the borrower is considered a risk, usually if they are borrowing more than 80% of the property purchase price. However, there are home loans available to individuals borrowing up to 85% of their property purchase price that come with no LMI fee.
It’s important to remember that LMI is designed to protect the lender, and not the borrower, in the event that the borrower defaults and is unable to meet their loan repayment obligations.
LMI can be paid in the form of a one-off, generally non-refundable payment usually made at the time of loan settlement. However, most lenders will add it to the total loan amount so it can be paid off on top of the borrower’s monthly loan repayment.
How much LMI you’ll be required to pay will depend on the size of your loan and the size of your deposit. LMI is calculated as a percentage of the amount borrowed. This means that the fee the borrower pays increases as the Loan to Value Ratio (LVR) and loan amount increases.
This fee varies slightly from lender to lender and depends on a number of variables including if the property is a new purchase or investment, if the property will be owner occupied, and where the property is located since stamp duty is payable on LMI.
The cost of LMI can be affected by multiple factors. These include:
The size of your loan
Your deposit amount (i.e those with a 5% deposit will pay more than those with a 15% deposit)
If the property is for investment or personal use
Your employment stability - may take into consideration your employment history and status (full-time, part-time, casual)
Your lender’s insurer
Lenders Mortgage Insurance is not something that you specifically will need, but it is something your lender may require you to pay for when you apply for a home loan. LMI is generally required for home loans with a Loan to Value Ratio (LVR) of 80% and above. In other words, if your deposit is less than 20% of the property purchase price.
If you are looking to avoid paying Lenders Mortgage Insurance (LMI), there are a few things you can do.
Ask your lender if your job is viewed as a low risk occupation. Low risk occupations include roles that are considered to have a lower risk of redundancy such as medical doctors, engineers, and accountants. Specific lenders will sometimes waive LMI for applicants in low risk occupations up to a maximum LVR of 90%.
Not all lenders require borrowers to pay LMI when borrowing more than 80% of their property purchase price. Some lenders will lend borrowers up to 85% of the cost of the property before charging them an LMI fee. If you can scrape together a 15% deposit then shop around with a variety of lenders to see if you can avoid paying LMI. This could save yourself thousands.
It may sound obvious, but try to grow your deposit as much as you can. Consider whether it is financially smarter to wait and grow your deposit before committing to paying LMI now.
If possible, ask family members to chip in by ‘gifting’ you funds towards the deposit and costs. They will need to provide written confirmation that this is a true gift and does not need to be repaid.
If the amount they are gifting means that you still need to borrow more than 80% of the value of the property, then you will still need to be able to show that you have accrued 5% of genuine savings yourself. However, some lenders will factor in your current rental expenses as a contribution towards this genuine savings requirement.
Another way to avoid paying LMI is to approach a lender with a guarantor. A guarantor is either a parent or close family member who will use some of the equity in their own home as a part of your home loan.
A guarantor’s equity will need to be sufficient to cover 20% of the property value, while some lenders will allow up to 27% to be used to cover associated costs as well (e.g. stamp duty, solicitor fees).
It's important to remember that guarantors are not regarded as the co-applicant on the loan. They are simply used as security and this means that the lender will hold the title for their property while they remain guarantors to your loan.
This means that if you ever default on your repayments, your guarantor will also be liable to repay the funds. Not all lenders will accept a family guarantor and those that do have specific requirements in regard to applications of this kind to ensure that the guarantors are aware of their obligations and are protected.
There is no clear answer to this question, it really depends on the borrower.
Some borrowers believe that it is in their interest to grow their equity by jumping on the property ladder and paying LMI now, rather than waiting and being completely priced out of the market if prices go up later on.
If you do go this route, you need to be aware that your monthly repayments will be higher. Also if interest rates rise, you may run the risk of being unable to make your home loan repayments altogether.
Other buyers take a more conservative approach by waiting until they have saved a larger deposit. While they may run the risk of missing out on a good deal now, they can live comfortably knowing they will not have to pay LMI on top of their monthly repayments once they eventually buy a property.
Since it was introduced in 1965, Lenders Mortgage Insurance has opened the property market up to a larger number of property buyers. It has allowed them to take out a loan with less of a deposit than would typically be required by a lender.
LMI works in the lender’s favour because it protects them in instances where a borrower defaults on their loan. Lenders are also earning more interest from the increased number of borrowers eligible for loans.