1) What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (LMI) is insurance that protects the lender in the event the borrower defaults on the loan, which happens when you stop making mortgage repayments. If the lender ends up taking possession of the house and the proceeds from the sale are insufficient to fully pay out the mortgage, the LMI insurance covers the balance that is still owed. The lender will pass on the cost of LMI to you. This is ussually done upfront as a one off fee. It needs to be paid for from your deposit or -in some instances- can be added to the loan.

This is important to understand, LMI only protects the lender and not you (or any guarantors). As a result, you are not eligible to make a claim under the LMI; only the lender can. LMI is different from Mortgage Protection Insurance which is an insurance that protects borrowers from default on their mortgage or the death of the borrower. 

The introduction of lenders mortgage insurance to Australia was in 1965 to help people who had less than a 20% deposit. It created opportunities for people with 5% or 10% in savings to get a home loan and also encouraged lenders to charge lower interest rates. The two largest LMI providers in Australia are Genworth Financial and QBE.

2) What are the benefits of LMI?

LMI makes home ownership more accessible, especially for borrowers with a low deposit or little equity. These borrowers can take out a mortgage before they have saved a 20% deposit. Lenders can offer the same loan amount but require a smaller deposit by employing LMI and transferring the risk to the mortgage insurer.

3) How much would LMI cost?

On a home loan of $500,000 for which you have saved a $50,000 deposit, LMI may cost $10,000. The amount of money you borrow and your LVR both affect how much LMI costs. The cost may change based on the lender. It is important to ask lenders how they determine the LMI cost.

4) Is LMI worth it over savings?

First-time homebuyers frequently ask whether it is better to pay LMI or postpone looking for a home until they have saved up a larger deposit. There is no right or wrong answer because every situation is unique, and the housing market can be unpredictable. On the one hand, you may be eager to get started in real estate because the time is right for you to buy a place to call home or you think property prices will increase. If your deposit is less than 20% in this situation, you might choose to pay LMI to purchase sooner. Otherwise, if you have more deposits, paying for LMI can be avoided.

5) How can I be exempted from paying LMI?

If your deposit payment is greater than 20% (or your loan is below 80%) of the property’s value or sale price, the lender will exempt the borrower from paying the LMI. This is because lenders believe borrowers who have a 20% deposit (or more) are less likely to default on a loan. A 20 per cent deposit is thought to be a substantial safety net to protect lenders from a decline in the property’s value so they can get their money back if the borrower defaults.

Other ways to be exempted are:

  • When you have a guarantor. If the borrower is supported by a reliable guarantor (such as a parent), many lenders may waive LMI on the loan (regardless of how minimal the deposit).
  • When you have a certain profession. Borrowers in some professions (such as doctors, accountants, lawyers, etc.) may with some lenders borrow up to 90% LVR without paying LMI.
  • When you get a government grant. If you qualify for a grant like the First Home Guarantee Scheme (FHG) you can have your LMI paid by the government. It let’s first home buyers secure a property with a deposit as low as 5%.
  • When you apply with certain lenders. Some lenders offer waivers for LMI but it’s very important to compare rates and fees most of the time.

For more information, Schedule a Free Consultation with our mortgage broker today. At Micah Finance Solutions, we make sure to give the best mortgage and LMI information to our clients.