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 over the last few years, many hopeful homebuyers watched their dreams of owning a home get dashed. 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.

Can I get a refund on my LMI premiums if I sell?

If you're exiting your home loan because you're selling your property or refinancing, and this means you have repaid your home loan fully 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, but it's still possible today. Banks and lenders will rarely offer you the money back – instead you'll need to ask the question as to whether your lender allows a partial refund.

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 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.