Unless you’ve ever gone through the process of buying a home, chances are you’ve never heard of Lenders' Mortgage Insurance. It’s not an essential piece of knowledge unless you’re trying to calculate how much to save for your deposit when trying to secure a Home Loan.
What is LMI?
LMI is a type of insurance that protects lending institutions in the event that customers take out a loan, aren’t able to meet their repayments and the sale of the property in question doesn’t raise enough to repay the loan.
I can hear you thinking: “Great – so the bank is protected – what’s in it for me?”
LMI actually reduces the risk faced by the lender, meaning that financial institutions are able to lend to borrowers with a deposit of less than 20% of the purchase price.
This means that instead of saving for longer to accrue a deposit of 20%, you may be able to save a deposit of 10%, or even 5% and then pay LMI to secure your home loan.
Why do we need LMI?
Let’s face it. Saving for a deposit is tough. If you’re able to save a 20% deposit, then LMI won’t be an issue for you at all.
However, if you’re finding it hard to save tens upon tens of thousands of dollars, or if you’ve found the perfect place and want to act quickly, and you’re only able to come up with a 5% or 10% deposit, LMI can come to the rescue.
With LMI in place, lenders are more likely to approve loans of up to 95% of the purchase price, safe in the knowledge that they’ll be able to re-coup their outlay in the event of financial difficulty or foreclosure.
How Much Is LMI?
Unfortunately, there’s not a silver-bullet answer to this question, but a safe bet is anywhere from $5,000 to $10,000.
LMI premiums will vary based on a number of factors, including the percentage of the purchase amount borrowed, the total loan amount and whether the deposit is all genuine savings or whether a portion of the deposit consists of a gift, donation or inheritance.
The good news? LMI is something you’ll only pay once. It’s arranged by your lender when you apply for a loan, and it’s paid at the time of settlement.
Frequently asked questions
How is LMI Calculated?
LMI is calculated as a percentage of the loan amount and your LMI will vary depending on your Loan to Value Ratio (LVR) as well as the amount of money you wish to borrow. The percentage you're required to pay increases as the LVR and loan amount increase, and usually goes up in stages.
How Can I Avoid LMI?
You can avoid or reduce your LMI costs by saving a larger deposit or using a parental guarantor to cover part of your deposit. You can also borrow the LMI premium by folding into your loan.
This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. Information in this article is current as at the date of publication.
