How LMI works
Lenders Mortgage Insurance (LMI) may be required if someone’s ability to make mortgage repayments is considered high risk. It’s paid by the buyer to protect the lender if repayments on loan can’t be met and the sale of the property doesn’t cover the outstanding loan balance.
What is considered ‘high risk’ lending?
LMI will usually be needed if someone wants to borrow over 80% of a property’s value. But if it’s a Low Doc loan (where someone can’t demonstrate their income in a standard format) then LMI is applicable from 60% to a maximum of 80%.
How is LMI calculated?
The LMI premium is calculated based on a number of factors including:
- The property purchase price
- Deposit amount
- Loan to value ratio (LVR)
- If the client is self employment
- State of the property
- If the property is for investment or owner occupied purposes
A Loan Market client purchased a home for $500,000 with a 10% genuine savings deposit.
Base loan amount = $450,000
LMI premium = $7,757.39
Stamp duty on premium = $832.50
Total LMI charge to client = $8,589
This example is based on a Commonwealth Bank calculation but every lender has unique calculations. It’s also worth noting that the majority of lenders will only add 2% of the purchase price value to the loan.
How does this change with just 5% genuine savings?
With the same purchase price of $500,000 and a 5% deposit of $25,000 (making a base loan of $475,000) the total LMI fee is around $15,502. The lender will only take the total LVR to 97% (by adding 2% or $10,000 to the loan) so there will be a shortfall that the buyer will need to cover. In this example it would be around $5,500 on top of the other fees and charges.
How does LMI impact your clients?
- Con: LMI is a one-off fee that can be subtracted from their loan or paid up-front. Essentially they will pay more but we will factor it into the costs when reviewing their financial plan
- Pro: They may be able to borrow more or buy sooner than they thought. Because the lender is protected by LMI, some lenders will consider loan deposits as low as five per cent.