Lenders Mortgage Insurance
If your home loan deposit is worth less than 20% of the property's value, you will need to pay lenders mortgage insurance (LMI). Learn how LMI works and how to avoid it.
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Lenders mortgage insurance (LMI) is one of those home loan borrowing costs that you've probably never heard of – until you have to pay it, that is.
Lenders mortgage insurance is something that Australian borrowers usually have to pay when they get a home loan and their deposit is less than 20% of their property's value.
LMI can cost anything from a few thousand dollars to tens of thousands of dollars, depending on the value of your loan and how much of a deposit you have. Generally, the bigger your deposit, the lower your LMI premium will be.
Here's an example:
- You buy a house worth $700,000 and you have a 5% deposit = $35,000
- You therefore borrow 95% = $665,000
- Your LMI cost (estimate) = $29,990
- LMI is protection for your lender, not for you. Don't get confused by the fact that you are the one paying the premium; it's designed to protect the bank or lender in case you default on your loan, rather than protecting you. It doesn't cover you if you miss repayments due to illness or job loss – mortgage protection insurance covers you in these situations, and it's a form of life insurance that has nothing to do with LMI.
How much is lenders mortgage insurance?
The amount you pay for lenders mortgage insurance depends on the size of your loan and your deposit size. If you're getting a low deposit home loan, you’ll need to estimate your potential LMI costs and factor them into your total home buying expenses.
Genworth is one of the biggest lenders mortgage insurers in Australia. Its LMI estimate calculator can provide a rough idea of your LMI costs. Here are some example estimates taken from Genworth:
|Property value||Deposit ($)||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.
How to avoid LMI
LMI is a big expense and something that most borrowers obviously would prefer to avoid. However, it's important to remember that without it, the majority of first home buyers and many other property buyers would be locked out of the real estate market, as it could take years (or up to a decade) to save a six-figure 20% deposit.
LMI was designed to address affordability issues for first-time buyers, to help them get on the property ladder without having to save a full 20% deposit. While it is a big expense, it pays to remember that without it, your dreams of property ownership may be out of reach for years to come.
That said, there are ways to avoid paying LMI, or at least to minimise how much it costs you:
- The First Home Loan Deposit Scheme. If you are a first home buyer, the First Home Loan Deposit Scheme may allow you to buy a property with a 5% deposit, without paying lenders mortgage insurance. Eligibility depends on where you are buying, your income and the value of the property you are buying.
- 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. If you can buy in a more affordable area where your deposit stretches further, or find cheaper co-living arrangements for 12 months to save money, you may be able to build a bigger deposit and avoid paying 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.
- Buy in partnership with someone. If you want to get on the property ladder sooner and you don't have a 20% deposit on your own, you could partner with a sibling or friend and buy as a joint venture. This way you both contribute to the deposit and you lower your risks and financial obligations.
- Get a shared equity agreement. This rare financial arrangement allows a third party (a family member, lender or government organisation) to contribute some of the property 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.
QBE and Genworth are the two biggest LMI insurers in Australia. Some lenders provide their own LMI. It's not really possible to compare lenders mortgage insurance providers because lenders generally have an exclusive agreement with one insurer.
Can I get a refund on my premiums?
Probably not. If you're exiting your home 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 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.
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.
How do I pay my LMI?
You can pay your lenders mortgage insurance premium in one of two ways: in a lump sum upfront, or you can capitalise it, 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 a $600,000 property
- You borrow $560,000
- Your LMI premium is around $15,000
- You capitalise the premium and borrow $575,000
- Your loan with your LMI premium included adds an extra $40 a week to your home loan repayments
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 six-figure deposit in order 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 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 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 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. In other words, 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 one lump-sum tax deduction in the year they are incurred (unless the total value is under $100).
Instead, you can claim these costs over five years or the full term of the loan (if the full loan term is shorter than five 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 five 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 essentially 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.
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