How to benefit from comparing LMI providers.
Lenders Mortgage Insurance (LMI) is viewed by many as a double-edged sword. Sure, it can get you into a home with a deposit of as little as 5%, but it can also add thousands to what might be an already expensive home purchase.
There are two major LMI providers in Australia, QBE and Genworth, as well as a small number of lenders who provide customers with their own version of this insurance, often under a different name.
What is LMI?
LMI, as the name suggests, is an insurance policy taken out by lenders to protect themselves from higher risk borrowers. Most lenders will require borrowers to have a 20% deposit when applying for a home loan. This demonstrates the borrower’s ability to save and budget, and means that if they default on their home loan, the lender will be able to sell the property and hopefully not lose any money in the process.
If you do default on your home loan and your property is sold for less than what you borrowed, you’ll still have to pay back the difference, but rather than pay back your lender you’ll pay your insurer.
Borrowers with a deposit of less than 20% present a higher risk to lenders. They might not be sure of if the borrower has learned valuable saving and budgeting lessons, and the smaller deposit amount means the borrower will own less of their home for longer. This means if property values decrease considerably, the borrower has a greater chance of owing the bank more money than the property is worth. This is known as having negative equity.
LMI premiums are expected to be paid upfront when getting a home loan, but many loans today will allow you to add them to your home loan total, known as ‘capitalisation’.
As mentioned, in Australia, lenders will go down one of two paths when obtaining LMI. They’ll either source it from one of the larger insurance companies such as Genworth or QBE, or they’ll have their own department which will source the insurance policy themselves.
Even if your loan is approved, this might not automatically mean that your LMI is approved. LMI providers will consider your loan application just as carefully as a lender would. This means that while your lender may think you’re able to pay back your loan, there’s always a chance that your LMI provider might reject it on grounds relating to your application, such as your income source.
Does it matter which LMI my lender uses?
The difference between LMI providers can be seen in two major ways:
- Price - Different LMI providers may charge different prices for the same coverage. This means it’s difficult to compare LMI providers to find the cheapest or best.
- Approval criteria - Each LMI provider will have their own unique approval process and criteria, which means you might be approved by one insurer but denied by another.
Knowing which LMI provider your lender uses can be useful if your LMI application is denied. If this happens, you can approach a lender who uses a different LMI provider and hopefully get approved. Unfortunately, borrowers cannot choose who their lender uses for LMI.
A bit more about the LMI heavyweights of Australia
Other LMI providers
As mentioned above, some lenders have their own LMI products. Below are some of the more well known lenders and what they call their LMI offerings.
- CBA - Commonwealth Bank Low Deposit Premium (LDP)
- RAMS - RAMS Risk Fee
Which LMI providers do the big four use?
At the time of writing, the big four use the following LMI insurers:
|Westpac||QBE or self insured|
|CBA||Genworth or self insured|
Other lenders can underwrite their own insurance or use Genworth or NAB. Bankwest for example use QBE, while St.George will self insure for loans with LVRs of under 90%, and use Genworth for LVRs over this.
Refinancing a home loan with an LVR of above 80% means that you might have to pay LMI, regardless of whether you paid it when first taking out your home loan or not. In some cases, if you refinance your home loan early enough in the term you may be able to get an LMI refund for your original loan. Conditions will as always depend on the LMI provider.
Genworth will refund your insurance premiums if you exit your loan within the first one or two years. QBE can also refund LMI premiums if your loan is terminated early, but don’t give any clear indication of time limits.
In most cases, the refund will not be for the full amount, which is why it’s important to carefully consider refinancing if your LVR is still above 80%.