Lenders Mortgage Insurance Explained: What It Costs and How to Avoid It
Lenders Mortgage Insurance, commonly referred to as LMI, is one of the most misunderstood costs in the property purchasing process. Many buyers are surprised to find out that this insurance does not protect them. It protects the lender. And it is the borrower who foots the bill.
Here is what LMI is, when it applies, what it costs, and how to avoid it.
What is Lenders Mortgage Insurance?
LMI is an insurance premium charged by lenders when your loan-to-value ratio (LVR) exceeds 80 percent. In practical terms, if you are borrowing more than 80 percent of the property's value (that is, your deposit is less than 20 percent), most lenders will require you to pay LMI.
The premium is paid to an LMI provider, typically Helia or QBE in Australia, and it insures the lender against loss if you default and the property sells for less than the outstanding loan balance.
How Much Does LMI Cost?
LMI is calculated as a percentage of your loan amount and rises as the LVR increases. As a general guide:
• At 85% LVR on a $700,000 loan, LMI is approximately $9,000 to $12,000
• At 90% LVR on the same loan, LMI typically rises to $18,000 to $24,000
• At 95% LVR, the premium can exceed $30,000
LMI is generally added to your loan balance rather than paid upfront. That reduces the immediate cash burden but means you pay interest on it over the life of the loan.
How to Avoid Paying LMI
There are several legitimate ways to purchase without incurring LMI, even with a deposit below 20 percent:
1. Save a 20 Percent Deposit
The most straightforward path. Once your deposit reaches 20 percent of the purchase price, LMI does not apply at most lenders.
2. The Federal Government First Home Buyer Deposit Scheme
Eligible first home buyers can purchase with a 5 percent deposit, with the government acting as guarantor for the remaining portion. This removes the requirement to pay LMI. Price and income caps apply.
3. A Guarantor Loan
A family member, typically a parent, offers equity in their own property as additional security. This allows you to access LMI-free lending without a 20 percent cash deposit. The guarantor's property remains at risk if the loan is not serviced.
4. Profession-Specific LMI Waivers
A number of major and specialist lenders offer LMI waivers to certain high-income professions, including medical practitioners, dentists, lawyers, and accountants. Eligible borrowers can often borrow up to 90 percent of the property value without paying LMI. LMI is not always the right thing to avoid at all costs. For buyers in rising markets, paying LMI to enter the market sooner can produce a better financial outcome than waiting to save a larger deposit. A mortgage broker can model both scenarios for your situation.
Frequently Asked Questions
Is LMI a one-time cost?
Yes. LMI is charged once at settlement. If you later refinance, most lenders will require a new LMI assessment. Some providers offer partial refunds on a sliding scale if you refinance within 2 years.
Can LMI be removed from my loan once my LVR drops below 80%?
No. Once LMI is paid, it cannot be removed. However, once your LVR falls below 80 percent, you may be able to refinance to a new lender without incurring LMI again.
James Ryan can assess whether you qualify for an LMI waiver and identify the most appropriate pathway into the market for your deposit level. Call 0466 669 328 or visit azurafinancial.com.au
This article provides general information only and does not constitute financial, legal, or tax advice. Readers should seek
professional advice in relation to their individual circumstances. James Ryan | Australian Credit Representative Number 562584 |
Authorised under Australian Credit Licence 389328.
