Lenders mortgage insurance (LMI)

Lenders mortgage insurance (LMI) can be expensive: If you bought a $600,000 house with a 5% deposit of $30,000 then your LMI premium could cost over $22,000 (based on Finder's LMI estimator).

You can avoid or reduce your LMI costs by saving a larger deposit or using a parental guarantor to cover part of your deposit. Eligible first home buyers can use the First Home Loan Deposit Scheme to avoid LMI completely. And you can also borrow the LMI premium by folding into your loan.

How much is lenders mortgage insurance?

The amount you pay for lenders mortgage insurance depends on the size of your loan and deposit. If you're getting a low deposit home loan, you'll need to estimate your potential LMI costs and factor them into your total home-buying expenses.

Here are some LMI premium estimates made using Finder's LMI calculator. These estimates can give you a quick idea of just how expensive lenders mortgage insurance can be.

*These costs are estimates only, taken from Finder's LMI premium estimate calculator. These numbers do not reflect genuine LMI quotes from an insurer.

Minimise your LMI costs with a larger deposit

As the examples above show, LMI can add thousands of dollars to the cost of buying a home. The cost of your property and the size of your deposit determine your LMI costs.

If buying the same property, a borrower with a 15% deposit pays less LMI than a borrower with a 5% deposit.

How do I pay my lenders mortgage insurance premium?

Borrowers usually pay LMI during settlement, when your lender provides the funds for your loan and you take possession of the property. This means you can pay your lenders mortgage insurance in a lump sum up front.

But there is another option: You can capitalise the premium, which means you add the premium to your loan. For this to happen, you'll need to borrow your LMI costs along with your loan amount, so that you're paying it off over time.

How does LMI capitalisation work?

• You buy an $800,000 property with a 10% deposit.
• You borrow $720,000.
• Your LMI premium is around $17,000.
• You capitalise the premium into your loan and borrow $737,000.
• Your loan interest rate is 5.50% and your loan term is 30 years.
• Your loan with your LMI premium included adds an extra $96 a month to your home loan repayments.

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Is LMI compulsory?

LMI is a requirement that banks and lenders have when you save a deposit of less than 20%. The purpose of LMI is to reassure your lender that you are a "safe bet". They want you to take out an LMI policy so they feel reassured that, if you stop making repayments and they have to sell the property, they will recover the full value of their loan.

If you have a 10% deposit, and your property has to be sold by your lender in a forced sale, there's a chance the property could sell for around the same amount of your loan or even less. This could leave your lender "out of pocket" in a forced sale situation.

LMI helps to offset this risk to the lender. If they have to sell your property and you only have 5-10% equity, with an LMI policy in place, they know they will recover all of their loan, even if the property sale doesn't cover it. They will get the full value of the loan repaid by claiming on your LMI policy.

LMI is not compulsory, although it is a firm policy of most lenders. Some lenders will choose to "self-insure", and they may charge you a risk fee instead of LMI. You can avoid paying LMI using some of the strategies listed below.

How to avoid LMI

There are ways to avoid paying LMI, or at least to minimise how much it costs you:

• Use the First Home Guarantee. If you are a first home buyer, the First Home Guarantee may allow you to buy a property with a 5% deposit without paying lenders mortgage insurance. Eligibility for this government scheme depends on where you are buying, your income and the value of the property you are buying.
• Leverage your employment. Some lenders offer LMI waivers to high earners in specific professions even if they don't have 20% deposits. This includes doctors and other medical professionals, accountants, actuaries and solicitors.
• Keep your loan-to-value ratio (LVR) below 80%. If you have a 20% deposit (which is an LVR of 80%), you don't have to pay LMI.
• Take out a family guarantee. A family guarantee or family pledge is when one of your family members guarantees part of your loan with their own property. This way you can borrow money with a low deposit and avoid LMI.

How to reduce the cost of LMI

If you can't avoid LMI completely you can still reduce your costs by:

• Increasing your deposit size. Even if it still comes with LMI, a 15% deposit means a smaller LMI premium than a 5% deposit.
• Buying a cheaper property. Reducing your budget means you can get a bigger deposit relative to the cost of the property.
• Use a first home owners grant to boost your deposit. If eligible, a first home owner grant can form part of your deposit.

LMI pros and cons

Can I get a refund on my premiums?

If you're exiting your home loan and have repaid it within 2 years of settlement, it might be possible to get a partial refund, depending on your lender. This option was more common prior to LMI changes in 2012, and it may no longer be possible.

However, it's always worth asking the question as your lender or mortgage insurer may have a unique policy that allows a partial refund.

LMI providers

Many lenders handle LMI with their own insurance products. These have different names depending on the lender. Many other lenders rely on 1 of 2 large lenders mortage insurers: Helia and QBE.

Helia

QBE

More questions about lenders mortgage insurance

• Is it worth paying LMI or should I avoid it at all costs?

  There's no doubt that avoiding paying an LMI premium will save you money, but it's worthwhile considering what that "saving" might cost you.

  There are times when paying LMI can be worth it, including:

  • If it will take you 10 years (or longer) to save a 20% deposit. If you're buying a home in a capital city, you may need a 6-figure deposit to reach 20%. It may be worth paying a small sum in LMI today to get your foot on the property ladder sooner.
  • If you're stuck paying high rent and the perfect property comes on the market. If the right property comes along, you need to decide if it's worth paying the extra cost to get the home of your dreams. Keep in mind that mortgage repayments are contributing towards paying down an asset that you will own, unlike rent, which helps pay someone else's mortgage.
  • If you're buying in a strong market and prices are rising. As prices in Sydney rose dramatically between 2016 and 2018, many hopeful homebuyers watched as 20% deposits became bigger. Those who jumped into the market with smaller deposits had to pay LMI, but given how fast prices rose, this was often the far more lucrative option.

• What happens if I refinance?

  You may be required to pay LMI more than once. This can happen if you wish to refinance your mortgage and the equity in your property is less than 20% of the property's value at the time. Your initial deposit was small (say 5%) and you haven't repaid enough to pass 20%.

  In this situation, refinancing might become too expensive.

  For instance, if you are refinancing a loan worth $600,000 and your property is valued at $700,000, then your LVR will be $600,000/$700,000 = 85.7%. You will be required to pay an LMI premium worth thousands of dollars.

  If you are refinancing to a new, lower interest rate that saves you 0.5% per year, you stand to save $600,000 x 0.05% = $3,000 per year.

  You will need to decide whether the money gained by refinancing makes the cost of LMI worth it. A mortgage broker may be able to help you run some calculations and work out the best path forward.

• Is LMI tax-deductible for property investors?

  Yes, as a property investor, the majority of your borrowing expenses are tax-deductible, and this includes your LMI premiums.

  You cannot claim your LMI premiums and other borrowing costs as 1 lump-sum tax deduction in the year they are incurred (unless the total value is under $100).

  Instead, you can claim these costs over 5 years or the full term of the loan (if the full loan term is shorter than 5 years).

  For example, if you take ownership of a property on 1 July (the first day of the financial year), you could claim a $15,000 LMI expense over 5 years at $3,000 per year. If you settle the purchase during the financial year, you will apportion the tax deduction according to the number of days that you've owned the property within that financial year. An accountant can help you work out the exact deductions that you may be entitled to.

• My home loan was rejected because of LMI: What do I do?

  When you apply for a home loan and you are required to pay LMI, you need to have your loan approved twice: once by the bank or lender, and a second time by the lenders mortgage insurer.

  This is because the LMI insurer is taking the risk from the lender. It can be the case that mortgage insurers are just as conservative, if not more so, than banks and lenders.

  There aren't many LMI insurers in Australia, which means that if your application for a home loan is rejected because of an LMI insurer's criteria, you might want to apply for another home loan with a lender that self-insures, or uses a different LMI insurer.

  Mortgage brokers can help you apply with lenders that can help match you with the right lenders mortgage insurer for your situation.