A homebuyer’s guide to lenders mortgage insurance

By Ericka Pingol

Whether you plan to buy your next home or you’re a first-time homebuyer, you must know that the deposit for your home purchase isn’t the only one you have to save for—especially if you plan to borrow more than 80% of the property’s value. One of the costs you should consider before jumping into the property market is the cost of Lenders Mortgage Insurance (LMI).

Millennial homebuyers are particularly unaware of Lenders Mortgage Insurance and how it can help them with their mortgage deposit hurdle, according to a study by Gateway Bank and Genworth Insurance.

While an LMI seem like an extra cost that may burden homebuyers, this insurance may help them achieve having their own homes, even without meeting the 20% deposit required for a mortgage.

Lenders Mortgage Insurance is a type of insurance that lenders may require to protect themselves should a borrower default on a home loan. Whether or not you need LMI depends on the amount of money you have for your deposit and your lender.

Most lenders require borrowers to have at least 20% of a house’s purchase price, paid upfront. This means if you need to borrow more than 80% of the purchase price, you will be required to pay for LMI. You may even be able to borrow up to 95% of the purchase price of a home with LMI.

If you plan to get a low-doc loan, you may need to get LMI for anything more than 60% of the purchase price of the home. There are some exceptions to this rule depending on your lender and product.

There is a common misconception that LMI and Mortgage Protection Insurance are the same things. This is completely incorrect. A Lenders Mortgage Insurance protects the lender should you become unable to pay off your loan, while Mortgage Protection Insurance covers your loan repayments in the event of death, sickness, unemployment, or disability.

The cost of LMI

There is no definite figure as to how much a Lenders Mortgage Insurance may cost you. There are many factors lenders may consider when calculating how much you have to pay for this insurance. Some of these factors are:

  • Loan size. The bigger your home loan is, the higher the risk the lender assumes when they loan you the amount. The higher the risk, the higher the LMI cost you may have to pay.
  • Deposit amount. Your deposit also affects the cost of your LMI. If you have a smaller deposit, you may have to pay more for the insurance because your lender will shoulder a greater amount for your loan.
  • Loan type. The type of loan product you choose also has an impact on how much you pay. For low-doc loans, you may have to pay for LMI if your loan amount is 60% of a property’s purchase price. The loan-to-value ratio (LVR) also affects the LMI cost. As mentioned, you are required to obtain LMI if you plan to borrow more than 80% of a home’s purchase price.
  • Mortgage insurer. The premium you must pay also depends on your insurance provider. The two biggest LMI providers in Australia are QBE and Genworth.

Sample calculation:

Property purchase price

$700,000

Deposit

$70,000 (10%)

First home buyer?

Yes

Loan term

30 years

Estimated payable LMI

$ 14,000

If you want to estimate how much Lenders Mortgage Insurance may cost you on a particular purchase price/deposit, use our LMI calculator.

You may pay for LMI upfront, in a single premium, or it can be capitalised into your home loan. You may talk to your loan provider to discuss your payment options. Take note that as with most insurance policies in Australia, LMI premium includes state and federal government taxes.

LMI exceptions

There are a couple of ways you may be able to avoid paying for Lenders Mortgage Insurance:

  • Saving more than 20% for a deposit. This is the most straightforward way to avoid paying LMI. However, it may take a very long time for you to save up the amount required for your home purchase.
  • Consider your career. Certain professionals such as lawyers and doctors may be eligible for an LMI waiver, if you meet certain conditions of the loan.
  • Applying for a guarantor loan. If you don’t have at least 20% of your prospective home’s purchase price, but you still want to apply for a mortgage, getting a guarantor may be your best bet.

A guarantor is an immediate family member who allows the equity of their own property to be used as additional security for your loan. Should you default on your loan, the guarantor will become responsible for all of it—principal, interest, and any additional fees. With a guarantor loan, you may be able to borrow up to 100% of the property purchase.

Getting LMI

Your loan provider will advise you if you require Lenders Mortgage Insurance and will prepare all necessary documents. Your lender will also assess if can meet regular mortgage repayments and other relevant policy.

In general, you will not be able to choose your LMI provider as lenders and LMI providers have commercial agreements. However, you can choose your loan provider which may help you also choose an LMI provider.

Most mortgage insurance companies provide LMI for residential home loans, property investment loans, construction home loans, and bridging financial loans, according to the National Financial Corporation.

It may seem like an additional burden to your home buying cost but getting Lenders Mortgage Insurance may enable you to buy your home sooner. Although it protects your loan provider should you default on your repayments, it also benefits you as a buyer—as it allows you to buy a home without saving up a full 20% deposit, which could take many years longer.

It is still best to talk a professional to discuss your home buying options. A mortgage broker, for example, may be able to give you sound advice on how you can get the best deals in the market to purchase your dream property.

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