What you need to know about Lenders Mortgage Insurance (LMI)

When stepping into the world of home buying, first-time buyers often encounter terms like Lenders Mortgage Insurance (LMI).

This comprehensive guide dives into what LMI is, how it works, and why a mortgage broker can make the process smoother, especially when using tools like an LMI calculator to make informed decisions.

What Is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (LMI) is a one-time premium paid by borrowers when their home loan deposit is less than 20% of the property’s value. It protects the lender in case the borrower defaults on the home loan, enabling lenders to offer loans with higher loan-to-value ratios (LVR).

LMI is an enabler for Australians looking to buy a home sooner without waiting to save a larger deposit​​.

How Does LMI Work?

LMI allows borrowers with smaller deposits to secure a home loan by transferring the risk of default to an insurer. When you apply for a home loan with a deposit of less than 20%, the lender may require LMI.

The cost of the LMI premium depends on the loan amount, deposit size, and other factors. Borrowers can pay this premium upfront or capitalize it into their loan repayments​.

What Does Lenders Mortgage Insurance Cover?

LMI protects the lender, not the borrower. If a borrower defaults and the lender cannot recover the full loan amount through the sale of the property, the LMI provider covers the shortfall.

Importantly, LMI does not cover borrowers’ financial obligations, reinforcing the need for buyers to understand their budget and repayment capacity​.

Why Home Buyers May Need to Pay LMI

For many first-home buyers, saving a 20% deposit is a significant hurdle. LMI enables these buyers to enter the property market earlier by lowering the upfront deposit requirement.

In 2023, with the average Australian home loan at $595,000, this equates to a savings of nearly $120,000 in upfront costs​​.

The Cost of LMI and Using an LMI Calculator

The cost of LMI varies significantly based on several factors:

• Loan amount
• Deposit size
• LMI provider

An LMI calculator is a valuable tool for estimating the premium based on your circumstances. This transparency helps home buyers assess whether paying LMI aligns with their financial goals.

For instance, a borrower looking to buy a $500,000 property with a 10% deposit might face an LMI premium of around $10,000-$15,000.

A mortgage broker can assist in evaluating options to minimize this cost​​.

LMI vs. Mortgage Protection Insurance

While both involve insurance, LMI protects the lender, whereas mortgage protection insurance safeguards the borrower, ensuring loan repayments in case of unforeseen events like job loss or illness​​.

Waiving or Reducing LMI: Is It Possible?

Certain professions, such as doctors, may qualify for LMI waivers or discounts through specific lenders.

Additionally, government schemes like the First Home Loan Deposit Scheme (FHLDS) can help first-time buyers avoid LMI entirely by providing guarantees for eligible buyers​.

Why Work with a Mortgage Broker?

Navigating LMI can be complex, but a mortgage broker simplifies the process by:

• Tailoring Solutions: Brokers understand individual circumstances and guide buyers to lenders with favourable LMI terms.
• Using Calculators Effectively: Brokers leverage tools like LMI calculators to provide clear cost breakdowns.
• Exploring Alternatives: They identify opportunities for LMI waivers or government assistance schemes.
• Streamlining Applications: Brokers manage the paperwork and liaise with lenders and insurers to ensure smooth approvals​​.

Your LMI Journey Made Simple

Lenders Mortgage Insurance is both a cost and an opportunity for many Australian home buyers. By working with a mortgage broker, you gain access to expertise, tools like LMI calculators, and a range of options tailored to your financial needs.

Take the first step today and let Selectabroker’s experienced mortgage brokers help you navigate the complexities of LMI.

Call us on 1300 510 045 for your free consultation and get started on your journey to home ownership with confidence.

Lender’s Mortgage Insurance FAQs

How much is Lenders Mortgage Insurance and how can I calculate LMI costs?

LMI costs vary depending on factors like your loan amount, deposit size, and property value. You can use an online LMI calculator to see how much it will cost in your specific situation. Generally, the smaller your deposit, the higher the LMI fee. Keep in mind that LMI can add thousands of dollars to your home loan amount.

Can first home buyers avoid paying LMI?

Some first home buyers may be able to avoid or reduce LMI costs. Government schemes like the First Home Loan Deposit Scheme can help eligible first home buyers purchase a property with as little as 5% deposit without paying LMI.

Additionally, some lenders offer LMI waivers for certain professions or high-income earners.

Is LMI a one-time fee or an ongoing cost?

LMI is typically a one-time fee paid at the time of settlement. However, many lenders allow you to capitalize the LMI premium into your home loan amount, which means you’ll pay it off over time as part of your regular mortgage repayments.

This can make it more manageable but will increase the total amount you borrow and pay interest on.

Can I get an LMI waiver, and who is eligible for an LMI waiver?

Some lenders may waive LMI for certain borrowers. Professionals in high-demand fields (like doctors, lawyers, or accountants), high-income earners, or those with strong financial profiles may be eligible for an LMI waiver. It’s worth discussing this option with your lender or mortgage broker to see if you qualify.

How does LMI differ from mortgage protection insurance?

LMI and mortgage protection insurance are quite different. LMI protects the lender if you default on your home loan, while mortgage protection insurance protects you, the borrower, if you’re unable to make mortgage repayments due to illness, injury, or job loss.

LMI is often required by lenders, while mortgage protection insurance is optional.

Can I avoid LMI by saving a larger deposit?

Yes, you can avoid paying LMI by saving a deposit of 20% or more of the property’s value.

This means you’ll be borrowing 80% or less of the property’s value, which is typically the threshold at which LMI is required.

While saving a larger deposit takes more time, it can save you thousands in LMI costs and reduce your overall home loan amount.

Is LMI transferable if I switch to a different lender?

Generally, LMI is not transferable between lenders. If you refinance your home loan with a different lender and still have less than 20% equity in your home, you may need to pay for LMI again.

However, some lenders offer LMI portability, which allows you to transfer your existing LMI policy to a new property.

It’s best to check with your lender about their specific policies.