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) = $29,990
When you add in stamp duty on top, your costs may be bigger than your deposit.
- LMI is protection for your lender, not for you. Don't get confused by the name. It doesn't cover you if you miss repayments due to illness or job loss. Mortgage protection insurance covers you in these situations, and it's a form of life insurance that has nothing to do with LMI.
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How much does LMI cost?
The amount you pay for lenders mortgage insurance depends on the size of your loan and your deposit size.
Genworth is one of the biggest lenders mortgage insurers in Australia. Their LMI estimate calculator can provide a rough idea of your LMI costs. The following quotes assume 30 year loan terms and the estimates given are for first home buyers.
| Property value | Deposit ($) | Deposit (%) | Estimated LMI cost* |
|---|---|---|---|
| $400,000 | $20,000 $40,000 $60,000 |
5% 10% 15% |
$12,768 $6,912 $3,842 |
| $600,000 | $30,000 $60,000 $90,000 |
5% 10% 15% |
$25,707 $13,176 $6,630 |
| $800,000 | $40,000 $80,000 $120,000 |
5% 10% 15% |
$34,276 $17,568 $8,840 |
| $1,000,000 | $50,000 $100,000 $150,000 |
5% 10% 15% |
$42,845 $22,050 $11,135 |
*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.
How can I avoid paying lenders mortgage insurance?
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.
How do I pay my LMI?
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.
Can I get a refund on my premiums?
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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If I make a lump sum to my loan which will bring me under 80%, would I be able to have the LMI stopped? Will the bank keep the remaining amount owing in insurance or cancel the remaining, as it was put into the total amount of the loan?
Hi Peter!
Thanks for the comment.
It would depend on how the LMI was agreed to be paid in your loan. If it was paid upfront and had been more than two years from settlement, you may not be able to recoup the said amount or at least the whole of it. But if it is included on your loan repayments, it may be recomputed by the LMI insurers.
You can contact your lender or mortgage insurer as this is reviewed on a case-to-case basis.
Hope this helps.
Cheers,
Jonathan
I have had finance approved,my lender(suncorp) will not allow me to pay for the lmi up front is this correct
Hi Ian,
Thank you for contacting finder.com.au, a financial comparison website.
Each lender has their own restrictions on how they handle LMI, if you would prefer to pay the LMI upfront you will need to discuss this with Suncorp directly or you can look at another lender that will allow for upfront payment of LMI.
There has not been any regulation changes regarding LMI, you might be best to contact a mortgage broker who can offer you a range of lenders that can assist you with your specific needs.
Regards
Jodie
I am buying a house with my 2 children who are both employed, I will be selling my house for approx $720.000 and buying the new house for $1m.I will be putting in $500.000 and the other half will be equally shared by my two children $250.000 each.
We have been approved finance, but now they require us to pay LMI insurance, as I am paying half the loan up front, do we have to pay this cost ? or can I refuse to pay it ?
Regards
David
Hi David,
thanks for the question.
LMI is required as a condition of finance with most lenders, so if a lender requires a borrower to pay LMI then they will have to in order to obtain a loan from them.
I hope this helps,
Marc.
I recently enquired about a housing loan and was advised that as of last week LMI is no longer able to be capitalised onto the principal of the loan, meaning that I have to come up with the LMI and a deposit before I can get a loan.
I am not sure if this is for this particular lending organisation or if it is actually now a legal requirement. Everything I find on the internet advises that LMI can still be capitalised.
Can you please advise me on the current situation in Australia?
Hi Jeshua,
Thank you for contacting finder.com.au, a financial comparison website.
Each lender has their own restrictions on how they handle LMI, there are still lenders who would allow LMI to be capitalised into the loan amount depending on your circumstances.
There has not been any regulation changes regarding LMI, you might be best to contact a mortgage broker who can offer you a range of lenders that can assist you with your specific needs.
Regards
Jodie
I have taken an LMI for a $216,000 loan for a property Purchased at $271,000, but the bank only valued at $235,000.
The cost of my LMI is $4,847.
Can you advise if I were to refinance after a period of 6 months and I do not need a LMI, how do I calculate the LMI reimbursement amount.
Hi Mohan,
thanks for the question.
The amount you’re reimbursed for will be worked out by the insurer used by your lender. I would recommend contacting them to find out how much you could receive back.
Cheers,
Marc.
Please send me a Loan Mortgage Insurance amount for following situation
Purchase price 600,000.00
Bank Valuation 560,000.00
Stamp Duty & other Charges 18,500.00
Loan obtaining from Bank without LMI = 520,000.00
How much the Loan Mortgage insurance
Hi Ranjith,
Thanks for your enquiry.
According to the Genworth LMI estimator, the LMI payable for this loan would be approximately $8 944.00 (excluding stamp duty).
I need to stress that this is an estimate and may not take into account many other factors that could determine your LMI premium.
It would be best for you to speak with your broker directly.
Thanks,
Belinda
I have recently paid out a loan after 8 months which had LMI am i entitled to a reimbursement on the insurance payed
Hi Malcolm,
Thank you for your question.
Generally speaking if you pay off your loan within the first few years you can apply for a refund of the LMI. I would recommend that you contact your lender and LMI insurer to discuss this with them.
Regards
Jodie
Hello guys,
Can you check my figures for me, my bank is confusing me.
I have a home valued at 720,000 and a mortgage on it of 500,000
So 220,000 equity.
I want to buy an investment property of 400,000 including the settlement costs.
The bank should lend 80% of the 400,000 which is 304,000 leaving me to come up with 96,000 .
With 80% of my homes equity I’ll have 175,000 to use . So no need for LMI and I should still have 79,000 in equity after the acquisition?
Any help would be great as my bank is saying I can’t borrow over 300,000 without LMI
cheers
Hi Mark,
Thanks for your question.
Generally speaking, you can borrow up to up to $240,000 (from the $300,000) without incurring LMI.
Given that your equity is $200,000 and you would like to use 100% of that amount, you’ll need to provide $20,000 to make up for this gap.
If these numbers still seem strange to you, it’s best to ask your lender for a breakdown of their calculations, as by law they are required to disclosed all of these. They may also have different policies regarding how LMI is calculated, so it’s best to ask them to explain these to you.
Cheers,
Shirley
HI,
If I take out a loan at 90% and incur the mortgage Insurance and add the amount to the loan, say in 12 months i have incurred enough capital growth for my loan to fall into a 80% LVR. Can the lenders mortgage insurance be cancelled and reimbursed?
Hi Gabrielle,
Thanks for your question. As it is a lump sum you won’t need to cancel it.
I hope this was helpful,
Richard
I have had a broker to assist with my home loan .
The property is $420.000 and i have $45.000 deposit.
I have been told i will be required to pay $12.000 LMI . My loan will be with CBA . Would this LMI calculations be correct ?
Hello Debbie,
thanks for the question.
According to the Genworth LMI estimator, the LMI payable for this type of purchase would cost from $6,600 to $7,350. This is purely an estimator and doesn’t take into account many of the other factors which go into deciding how much LMI is payable, so if you feel this LMI premium is too high it may be a good idea to discuss it with your broker.
I hope this helps,
Marc.