If your deposit is less than 20% of the property's value you have to pay lenders mortgage insurance. It can cost you thousands, but there are ways to avoid it.
Lenders mortgage insurance (LMI) protects your lender if you can't repay your mortgage. Borrowers with smaller deposits (under 20% of a property's value) usually have to pay it.
LMI can cost anything from a few thousand dollars to tens of thousands of dollars. Here's an example:
- You buy a $700,000 house with a 5% deposit ($35,000)
- You borrow 95% = $665,000 mortgage
- Your LMI cost (estimate) = $29,990
When you add in stamp duty on top, your costs may be bigger than your deposit.
- LMI is protection for your lender, not for you. Don't get confused by the name. It doesn't cover you if you miss repayments due to illness or job loss. Mortgage protection insurance covers you in these situations, and it's a form of life insurance that has nothing to do with LMI.
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The amount you pay for lenders mortgage insurance depends on the size of your loan and your deposit size.
Genworth is one of the biggest lenders mortgage insurers in Australia. Their LMI estimate calculator can provide a rough idea of your LMI costs. The following quotes assume 30 year loan terms and the estimates given are for first home buyers.
|Property value||Deposit ($)||Deposit (%)||Estimated LMI cost*|
*These are estimates only, taken from Genworth's premium estimate calculator. All estimates are for first home buyers. Premiums are slightly higher for non first home buyers.
As the examples above show, LMI can add thousands of dollars to the cost of buying a home. If you bought a $1,000,000 home with a 5% deposit of $50,000 you could end up paying almost as much in lenders mortgage insurance premiums.
There are ways to avoid LMI, or at least minimise your costs. Some ways to avoid paying LMI include:
- Keep your loan to value ratio below 80%. Low deposit home loans come with LMI charges. If you have a 20% deposit (LVR of 80%) you don't have to pay LMI. In other words, save a bigger deposit to avoid 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. They can usually nominate how much to pledge, and this is then added to your deposit amount. If you haven't saved enough to avoid paying LMI, a family guarantee can get you over the line with an acceptable LVR.
- Get a shared equity agreement. This is relatively rare financial arrangement that allows a third party (it could be a family member, a non-profit, a lender or a government organisation) to contribute some of your purchase costs. In exchange, the contributor receives a portion of your equity when you sell. A shared equity agreement can help you avoid LMI by increasing your deposit size.
While QBE and Genworth are the two biggest LMI insurers in Australia there are others. But it's not really possible to compare lenders mortgage insurance providers to find a cheaper policy because lenders generally have an exclusive agreement with a particular provider.
You can pay your lenders mortgage insurance costs upfront, or you can capitalise it, which means you can borrow your LMI costs along with your loan and pay it all off over time.
How does capitalisation work?
- You buy a $300,000 property
- You borrow $270,000 and your LMI premium is around $4,000.
- You capitalise the costs and borrow $274,000
- You can cover your LMI premium and repay it with the loan, adding an extra $20 a week to your repayments.
Is it worth paying LMI or should I avoid it at all costs?
If you're able to save a 20% deposit, then avoiding LMI will save you money. But there are times when paying LMI can be worth it, 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 home of your dreams. And keep in mind that mortgage repayments, unlike rent, add to your equity.
- You're buying a property in a strong market and prices are rising all the time. As prices in Sydney rose dramatically from 2012 to 2017, many hopeful homebuyers watched as 20% deposits became bigger and bigger. Those who jumped into the market with smaller deposits had to pay LMI, but given how fast prices rose this was often the cheaper option.
While you can never predict this entirely, if you're expecting the value of your property to rise, then getting your foot in the door earlier can be the wiser option even with the added cost of lenders mortgage insurance.
Probably not. If you're exiting your loan and have repaid it within two 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 may no longer be possible. But it never hurts to ask.
Keep in mind that the lender may have their own guidelines regarding the criteria you need to meet for a LMI premium refund.
How do I apply for a refund?
To request a refund, contact your lender and tell them that you’d like to apply for an LMI refund. They will then notify you of the process and the next steps required. You may need to put forward a written request.
More questions about lenders mortgage insurance
How is LMI arranged?
LMI is not automatically applied for and must be organised with the application to the loan. The application documents for LMI that will have to be paid when you are refinancing will be organised by the lender. They will give you the documents and answer any questions that you may have about the insurance. If you pass all the requirements for LMI then you'll be issued with it.
My home loan was rejected because of LMI: What do I do?
There aren't many LMI insurers in Australia, which means 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 who self-insures or uses a different LMI insurer.
Mortgage brokers are a good source of expert advice in this regard. They'll know which lenders to approach for your situation, and don't usually charge you anything, as they're paid by your bank through commissions.
Do home loans have to be approved by the lenders mortgage insurer?
You might be surprised, but applications for risky home loans also have to be approved by mortgage insurers. This is because the LMI insurer is taking the risk from the lender. You will find that mortgage insurers are just as conservative, if not more so, than lenders. They require the borrower to have a credit history with no blemishes, a savings record and stable employment.
The lender will take care of submitting the documentation to the mortgage insurer, but cannot guarantee your application will be approved if you do not meet the criteria.
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