Learn how Lenders mortgage insurance (LMI) works, estimate your costs and discover smart ways to avoid or waive it to buy a home sooner.
Lenders mortgage insurance (LMI) is a once-off premium that lenders charge borrowers who want to buy a property but don’t have a sufficient deposit (generally 20%), or refinance their mortgage but don’t have sufficient equity. It allows you to buy a home sooner and potentially benefit from property price growth that might otherwise outpace your ability to save.
LMI protects lenders against the risk of not recovering the outstanding loan balance should you be unable to pay your mortgage and the property is sold for less than what is owed. This premium is usually required to be paid upfront, although some lenders allow you to capitalise the cost into your home loan and pay it off as part of your repayments.
You can often capitalise the LMI cost by adding it to your total loan amount, meaning you don’t need the cash upfront, though you will pay interest on that extra amount over the life of the mortgage.
Choosing to pay LMI in exchange for homeownership is not necessarily a bad idea.
That’s because you won’t need to spend as many years saving up for a 20% deposit and can, thus, buy sooner. Surprisingly, that could actually save you money in the long run if your LMI premium is lower than the increase in property prices might be if you entered the market later.
Also, you might be able to buy a more expensive property. For example, if you had a $200,000 deposit, you could buy a $1 million property with a 20% deposit and not pay LMI, or buy a $1.4 million property with a 14% deposit and pay LMI.
Let’s look at your borrowing power and see if LMI is a strategic step forward for you.
LMI is calculated based on the size of the deposit, the loan amount and varies depending on the lender you choose.
The amount increases as the loan-to-value ratio (LVR) and loan amount increases.
If you were an owner-occupier who wasn’t a first-home buyer and bought a $1 million property, you could expect to pay LMI of about:
LMI could be waived if you buy a property under the federal government’s Home Guarantee Scheme (HGS) or with a guarantor mortgage. Some lenders also offer LMI exemptions under certain conditions to professionals with large and reliable incomes, such as medical, legal and accounting professionals.
