Lenders mortgage insurance (LMI) is a one-off insurance cost that lenders usually charge when you borrow more than 80% of a property’s value. Despite the name, it doesn’t protect you. It protects the lender if you can’t repay the loan and the property sells for less than you owe.
That can feel a little unfair, since you’re the one paying for it. But LMI is also what allows many people to buy a home sooner, with a smaller deposit than they would otherwise need.
Who LMI protects
If a borrower falls behind and the lender has to sell the property, the sale price may not cover the full debt. LMI covers the lender for that shortfall. It doesn’t cover your repayments if you lose your job or fall ill, and it doesn’t protect your equity in the home. If a claim is paid, the insurer may still seek to recover the shortfall from the borrower.
If you want protection for yourself, that’s a separate type of cover, such as income protection or life insurance, and worth discussing with a qualified adviser.
When LMI applies
LMI is linked to your loan-to-value ratio (LVR), which is the size of your loan compared with the value of the property.
- LVR of 80% or less: LMI usually doesn’t apply.
- LVR above 80%: LMI usually applies, and the cost rises as the LVR gets higher.
For example, on an illustrative $700,000 home, borrowing $560,000 is an 80% LVR. Borrowing $630,000 is a 90% LVR, which would usually attract LMI.
The thresholds can vary. Some lenders apply LMI at different LVRs for certain loan types, and lenders also set their own limits on how high an LVR they’ll accept.
How LMI is calculated and paid
The cost of LMI depends mainly on how much you borrow and your LVR. The insurer and lender’s policies also play a part. Bigger loans and higher LVRs generally mean a higher premium.
LMI is usually paid in one of two ways:
- Upfront at settlement, from your own funds.
- Added to your loan, often called capitalising the premium. This means you don’t need extra cash on the day, but you’ll pay interest on the LMI amount over the life of the loan. It also increases your loan balance, which pushes your LVR up a little.
LMI is generally tied to the specific loan and lender. If you refinance to a different lender while your LVR is still above 80%, you may need to pay LMI again. That’s one reason it’s worth thinking carefully before switching while your equity is still building.
A note from Jenny LMI isn’t automatically a bad thing. For some buyers, paying it means getting into the market years earlier, while for others it makes sense to wait and save. I’ll walk you through the actual cost so you can weigh it up with clear numbers in front of you.
Ways to reduce or avoid LMI
There are several ways to reduce the cost of LMI or avoid it altogether. Not every option suits everyone, and each comes with its own trade-offs.
Save a bigger deposit. A deposit of 20% or more of the purchase price usually means you won’t pay LMI. Even if you can’t reach 20%, a slightly larger deposit can move you into a lower LVR band and reduce the premium.
Use a family guarantor. Some lenders let a family member, usually a parent, use equity in their own property as extra security for part of your loan. This can bring your LVR down and help you avoid LMI. It’s a serious commitment for the guarantor, because they could be asked to repay the part of the loan they’ve backed if you can’t. Everyone involved should get independent legal advice first.
Use the Australian Government 5% Deposit Scheme. Eligible buyers can purchase with a deposit from 5% without paying LMI, because the government provides a guarantee to a participating lender for part of the loan. Price caps and eligibility rules apply, so check the official scheme website for current details.
Ask about professional waivers. Some lenders may waive LMI for certain professions, typically where the borrower’s income is considered stable. These policies vary between lenders and can change, so it’s worth asking whether your occupation could qualify.
Build equity before your next move. If you already paid LMI, the premium isn’t refunded as your equity grows. But building equity through repayments, and any rise in your property’s value, can help you avoid paying LMI again when you refinance or buy your next home.
The bottom line
LMI is a cost you’ll want to understand, not necessarily avoid at all costs. Compare the price of LMI with how long it would take you to save a bigger deposit, and what might happen to property prices and your rent in the meantime. Looking at the full picture makes the decision much clearer.
This information is general in nature and does not take into account your objectives, financial situation or needs. Lending criteria, terms, fees and charges apply and vary between lenders. Speak with us for advice about your circumstances.