A Guide to Lenders Mortgage Insurance
It’s no secret that buying a house is an expensive proposition, most likely the most expensive proposition you will ever undertake.
In addition to the deposit and transfer duty, there are a number of other fees or services for which you may need to account. Depending on the size of your deposit, Lenders Mortgage Insurance (LMI) may be one of those additional fees.
Key Points
LMI is compulsory for most people, if borrowing more than 80% of your home's purchase price.
LMI covers the bank, not the borrower (ie, it does not cover you).
You do not have to pay your LMI premium upfront - it can be added to your loan amount.
Adding your LMI premium on to your loan, increases your loan amount, and your repayment amount.
What is LMI?
When you enter into a mortgage, or any type of loan, there is an expectation that you will be able to pay off that loan in a timely manner - but what happens if there is a sudden change to, or loss of, your income?
Imagine you lose your job, are injured and unable to work, or are otherwise unable to make your mortgage repayments. What happens then? A LMI policy protects the lender from financial loss, in the case the borrower is unable to make repayments.
If the property goes into default and the sale of said property doesn’t fully cover the cost of the mortgage, the lending institution can claim against the Lenders Mortgage Insurance policy to fully, or partially, cover this difference.
As the name suggests, LMI benefits the lender, not the borrower.
For borrowers, a Mortgage Protection Insurance policy can help cover home loan repayments for a time in the event of loss of income or any other inability to meet payments.
When is LMI required?
Lenders Mortgage Insurance is typically required when a home loan deposit is less than 20% of the value of the property.
Some lenders may have their own specific regulation around the need for an LMI policy, so it’s best to know this upfront before committing to any lender.
A few lenders - including some of the big banks - will allow lower deposits under certain circumstances, which may mean you can pay only a 15% deposit without needing LMI.
If you work in certain industries, the bank may lend up to 90% of your property purchase price, without requiring LMI. Such industries include:
Accounting professional
Medical professional
Legal professional
Financial professional
Speak to your broker to find out if you qualify for any LMI exemptions:
Compare & SaveDo I have to pay LMI?
If you’re required to take out a Lenders Mortgage Insurance policy, you are required to pay for it, but that doesn’t mean you have to pay up front.
While it is possible to pay for the policy in full, the cost of the policy can also be added to the overall value of your home loan, so it can be paid off over time and built into your regular repayments.
Of course, if you do choose to capitalise (add your LMI cost to the loan amount of your mortgage), you will be charged interest on this additional amount, making your LMI policy more expensive in the long run.
In addition, the premiums on a Lenders Mortgage Insurance policy are typically non-refundable and non-transferrable.
This means that if you refinance your mortgage with another lender, then the policy won’t transfer over and you may need to take out a new LMI policy with the new lender, as well as continue to pay off the original policy.
You’ll have to pay for a new policy if your refinance amount is 80% (or more) of the value of your property though.
How is Lenders Mortgage Insurance calculated and what affects the cost of LMI?
The cost of an LMI policy is calculated on the value of the property and the size of the deposit.
If your deposit is 20% or higher then there's usually no need for a Lenders Mortgage Insurance policy, but the smaller the ratio of deposit to overall value, the higher the cost of the policy.
The exact amount of a policy is calculated by multiplying the LMI rate of a lender by the loan amount of a borrower.
The Lenders Mortgage Insurance rate typically scales with the size of the loan when compared to the size of the deposit, with smaller deposits incurring a higher rate than larger deposits.
Each lender has their own LMI rate they use to calculate values, but as an example, using an online LMI calculator utilising average LMI rates, the estimated value of a policy for a property valued at $550,000 is:
5% deposit ($27,500) - LMI priced at approximately $20,890.
10% deposit ($55,000) - LMI priced at approximately $9,271.
15% deposit ($82,500) - LMI priced at approximately $4,530.
Some financial institutions may also have different LMI rates depending on whether the property is for residential or investment purposes.
Your employment status - full-time, part-time, self-employed - may also increase or decrease your LMI rates depending on how the lender assesses you as their risk.
Can LMI be waived or are there any alternatives to LMI?
There is a government initiative available across Australia that allow first home buyers to waive having to purchase an LMI policy.
The First Home Loan Deposit Scheme (FHLDS) allows eligible first home buyers to enter into a mortgage with a 5% deposit.
Instead of the bank requiring the first home buyer to take out an LMI policy, the government instead guarantees the loan. The FHLDS is only available to 10,000 first home buyers a year. The need for an LMI can also be waived if you have a family member act as a guarantor. A guarantor agreement should not be taken lightly.
In the event that repayments can’t be made by the borrower, the guarantor becomes responsible for paying the mortgage, putting their own savings and assets at risk.
To become a guarantor, a person must meet a number of criteria, including having a good credit score, a stable income and equity in their own property to be used as security for the loan.
Is Lenders Mortgage Insurance worth it?
While a Lenders Mortgage Insurance policy doesn’t help a borrower cover costs, it does enable people to purchase a home with a smaller deposit than they might otherwise need. In addition, if you only have a small deposit, and you’re looking to take out a loan to buy a place, you don’t have a lot of choice.
What are the benefits of having mortgage protection insurance?
Unlike Lenders Mortgage Insurance, Mortgage Protection Insurance is intended to protect you, not the bank.
These policies help cover repayments on your home loan if you suffer from a serious illness that is covered by the policy, are injured, or are made involuntarily redundant. Some policies may even pay off your house if you die. While the exact amount covered by a mortgage protection insurance policy differs due to provider, length of time it has been paid into, and other factors, these policies typically offer three forms of payment, depending on the situation.
Involuntary Redundancy - in the case of job loss most policies will offer regular home loan repayments for a limited period while you look for another job.
Injury or Illness - if you suffer from an illness or injury, the policy will offer regular home loan repayments while you recover.
Diagnosis of Terminal Illness or Death - in the case of a terminal diagnosis or death, the policy may pay a lump sum to help pay off your mortgage before you die, or to allow your family to pay off your mortgage.
Are there any drawbacks of having mortgage protection insurance?
The only real drawback to mortgage protection insurance is that the cover only lasts for a limited time. The exact period during which a policy may cover you in the case of injury or redundancy varies, but it’s always limited.
This means that while you may be covered for a few weeks or a month, it may not be long enough for you to recover and return to work or find a new job.
A mortgage protection policy will also only cover your mortgage, no other bills or expenses. The cost of such a policy is determined by a number of factors, including your insurer, level of cover, the size of your home loan, the number of people included in your policy, your age, gender and more.
As the insurance typically lasts for the length of your loan, a mortgage protection policy may add up to a considerable expense.
A $1000 dollar policy on a 30 year mortgage will cost $30,000 over its lifetime. Of course, if you can afford a mortgage protection insurance policy, they can offer you peace of mind if the worst does happen Whether you're looking to refinance your current property, are looking to invest in property, or are applying for your first home loan, Compare Club has the tools and knowledge to aid you every step of the way.
