How Much Is Lenders Mortgage Insurance? Saving for a home is no small feat. In addition to the home loan deposit amount, there are a number of additional costs that you generally have to factor in before you can get on the property ladder. Depending on how much you deposit, lenders’ mortgage insurance can be one of these costs.
So what actually is Lenders Mortgage Insurance (LMI)? How Much Is Lenders Mortgage Insurance? And when will you pay for it?
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What Is LMI and How Does It Work?
LMI is an insurance policy that some mortgage borrowers need to pay for. The purpose of an LMI is to protect the lender from financial loss if the borrower cannot afford to make the payments on his home loan.
If the borrower defaults on their loan and the sale of the property is not equal to the unpaid value of the mortgage, the lenders can claim the LMI policy to make up the difference.
Many people think that an LMI is designed to protect a borrower in the event of a loan default, but this is actually mortgage protection insurance, which is a different product. The true purpose of an LMI is to protect the lender and benefit the lender. In addition, by reducing the risk to the lender, LMI can allow banks and other financial institutions to lend larger amounts and to approve more home loan applications.
If your lender requires you to obtain an LMI, it can usually be paid in advance or capitalized (on top of) your home loan. If the LMI amount in your loan is capitalized, you will generally be charged interest on it by your lender, in addition to the remainder of your loan. LMI installments are usually non-refundable which means that if you transfer your loan to another provider in the future, you will generally not be able to transfer your LMI to another lender. Depending on the situation, you may have to pay for a new policy through the new lender.
When is LMI required?
Generally, a lender will require you to pay an LMI if your home loan deposit is less than 20% of the total value of your property – so if your loan-to-value ratio (LVR) is more than 80%. However, since different lenders may have different rules, it can be helpful to check each individual lender’s policy.
If you’re looking to avoid paying an LMI but don’t have enough savings deposits, you might be better off not entering the housing market just yet, and waiting until you’ve saved up to the 20% deposit generally required to avoid paying an LMI. You may also consider a first home warranty scheme if you qualify.
How Much Is Lenders Mortgage Insurance – What Affects The Cost of LMI?
How Much Is Lenders Mortgage Insurance? To answer this question, there are a few factors that may affect the cost of LMI. These can include:
- The size of your home loan
- Your deposit amount
- Whether the property is for investment purposes or for living
- Whether you are a full-time or casual employee
- The insurer used by the financial institution
I. Loan size
The more money you borrow, the greater the potential loss to the financial institution should you default. For borrowers, this usually means that the larger the loan, the higher the cost of insurance.
II. Your deposit amount
The lower your deposit amount, the higher the LMI cost. For example, according to the Genworth LMI Premium Calculator, a hypothetical first home buyer (and landlord-occupant) with a 5% deposit on $600,000 of real estate and a loan term of up to 30 years would pay approximately $23,954 in LMI, if they chose to pay Insurance premium upfront. By comparison, if the same borrower had a 15% deposit, they would pay about $6,463 in LMI costs.
III. Whether the property is for investment or to live in
Some financial institutions and insurance companies may differentiate between investing and purchasing residential real estate when it comes to the cost of LMI. Using the same amounts as the hypothetical examples above, an investment borrower with a 5% deposit would pay about $27,565 for LMI, and the same investment borrower with a 15% deposit would pay about $7,413, according to Genworth’s Calculator. Based on these sample calculations, an investor could end up paying about 215% more for an LMI than an owner-occupation first home buyer.
IV. Full-time or casual
Your employment status can also affect the perceived risk of your lending, so this is another factor that may affect your LMI premium.
V. The insurer used by the financial institution
There are many LMI providers, and like any other insurance product, premiums can vary between institutions.
How Much Is Lenders Mortgage Insurance?
How Much Is Lenders Mortgage Insurance? The actual LMI cost will depend on a combination of factors that collectively affect the lender’s risk assessment of you as a borrower.
How Much Is Lenders Mortgage Insurance? To give you a rough idea, we’ve used an LMI calculator available through one of Australia’s largest LMI providers, Genworth, to give you some hypothetical ‘ballpark’ cost calculations.
This is based on upfront installments (excluding stamp duty) of the first home borrower. If you decide to make use of LMI on your home loan, you will also have to factor in the additional interest that will be charged to you on the security deposit over the life of the loan.
How Much Is Lenders Mortgage Insurance?
| Cost of property | 5% deposit | 10% deposit | 15% deposit |
| $500,000 | $14,871 | $8,679 | $4,712 |
| $600,000 | $23,954 | $13,284 | $6,463 |
| $700,000 | $27,946 | $15,498 | $7,540 |
| $800,000 | $31,939 | $17,712 | $8,617 |
| $900,000 | $35,931 | $19,926 | $9,694 |
How Much Is Lenders Mortgage Insurance? The premiums listed are for first-time home buyers (owner-occupiers) taking loans with a loan term of up to 30 years and excluding stamp duty.
As you can see from the above, LMI can come at a high price, so it might be worth looking into some strategies to avoid the cost, if possible.
How to avoid or reduce the cost of an LMI
In some cases, you may be able to avoid or reduce the cost of an LMI. Here are some ways you might be able to do this:
- Increase your deposit to 20% or more
- Look for lenders that offer to discount or waive LMI costs
- Get a family member to go underwriter
- Apply for a first-deposit home loan scheme
- Compare LMI rates from a number of lenders
a) Increase your deposits
To avoid paying an LMI, you typically need to make a deposit of 20% or more of your lender’s valuation of the property. It can be worth weighing the pros and cons of giving yourself more time to save, compared to entering the real estate market early.
For example, a high-interest savings account is one method that is commonly used to save and increase funds for that all-important deposit, although the current low-interest rates offered may make it difficult to increase your deposits using this approach. Some institutions also offer savings accounts designed specifically for those who are saving for a home deposit.
Alternatively, you may be able to ask your parents to participate. A monetary gift from your parents or a relative may be enough to get you to cross the line and avoid LMI. However, this does come with financial risks. Some financial institutions are not willing to accept third-party cash as real deposit savings, while others will allow you to avoid LMI by using this strategy.
b) Look for lenders that offer to discount or waive LMI costs
In the bullish real estate market, it has become difficult for many borrowers to build up a 20% deposit and maintain it at that level. In response, some lenders have begun offering LMI discounts to eligible customers, while others offer to waive the cost of LMI entirely.
c) That one of the family members be the guarantor
The guarantor is the person who guarantees you part or all of your loan, and in the event that you are unable to repay, the responsibility lies with him. This removes a lot of the risk for the lender, but can also introduce a great deal of risk to the person or people who act as the guarantor.
This decision should not be taken lightly. After all, the personal guarantor is likely to risk their savings and assets, including their home in some cases. You can read more about getting a home loan here. Since it is a major decision to make, it may be a good idea to seek professional advice before making the decision.
d) A first-home warranty plan
If you are an eligible first home buyer, another option is to apply for the federal government’s First Home Guarantee Plan. Under the scheme, eligible homebuyers who are selected to participate can apply for a loan with a deposit as small as 5% and will not need to pay the LMI if the loan is approved by the lender. The government basically guarantees the additional amount required to reach the 20% deposit.
First-home buyers with annual incomes of up to $125,000 (or $200,000 for a married couple) qualify. Keep in mind that the number of guarantees available through this system is limited. Consider checking if there is availability in the current year, or if you will need to wait to apply the following year. There is also a Family Home Guaranty Scheme and a Provincial Home Guaranty Scheme that you can consider if you qualify.
e) Compare LMI rates from a number of lenders
As mentioned earlier, the cost of LMI can vary between financial institutions. The two main providers of LMI in Australia are Genworth and QBE. Generally, lenders have contracts with one or both of these providers and may have negotiated a certain set of arrangements with them for their clients.
Some lenders also self-insure loans for certain borrowers. Before you begin the home loan application process, feel free to ask some financial institutions for the estimated cost of an LMI. It can vary widely between providers.
What else should you pay attention to if you are borrowing with a low deposit?
The cost of paying for an LMI is just one of the possible effects of buying a home with a small deposit. A low deposit/high LVR means you’ll be borrowing more money and that generally means paying more interest to the bank than you might otherwise need. This could put a strain on your finances in the future, particularly if interest rates rise, which can happen for a reason including if the RBA decides to increase its target interest rate.
Having a small deposit and therefore a low level of equity (equity) in your home to begin with can also be a problem if property values are dropping, as you could enter into negative equity. This happens when your home is worth less than your loan and can make it difficult to sell your home in the future or refinance it if you want to switch to another lender.
Conclusion – How Much Is Lenders Mortgage Insurance?
The actual LMI cost will depend on a combination of factors that collectively affect the lender’s risk assessment of you as a borrower.
Here in this guide, we have helped you with everything you need to know such as what actually is LMI? How Much Is Lenders Mortgage Insurance? And when will you pay for it?.