What is Lender Mortgage Insurance
Lenders Mortgage Insurance (LMI) is a type of insurance that protects the lender in the event that the borrower defaults on their home loan and is unable to repay the debt. This insurance is typically required when the borrower has a loan-to-value ratio (LVR) greater than 80%, meaning they are borrowing more than 80% of the property’s value. Here’s a detailed explanation of LMI:
Key Points about Lenders Mortgage Insurance
Purpose
- Risk Mitigation: LMI mitigates the risk to the lender by providing coverage against potential losses if the borrower defaults on the loan.
- Enabling Higher LVR Loans: It allows lenders to offer loans to borrowers with lower deposits, typically less than 20% of the property’s value.
Who Pays for LMI?
- Borrower-Paid: Although LMI protects the lender, the cost is borne by the borrower. It can be a significant expense, especially for high LVR loans.
- Upfront or Added to Loan: The premium can be paid upfront or capitalized (added to the loan amount), meaning it is included in the total loan and repaid over time with the mortgage.
How LMI is Calculated
- Factors Influencing Cost: The cost of LMI depends on several factors, including the loan amount, the LVR, and the lender’s specific policies. Higher LVR and larger loan amounts generally result in higher LMI premiums.
- Premium Rates: Each lender has its own rate tables for LMI, and these can vary significantly. It’s important for borrowers to compare LMI costs when shopping for a mortgage.
When is LMI Required?
- LVR > 80%: Most lenders require LMI when the LVR exceeds 80%. This threshold can vary slightly depending on the lender’s policies and the type of borrower (e.g., first-time homebuyers, investors).
Benefits to Borrowers
- Lower Deposit Requirements: Borrowers can enter the property market sooner with a lower deposit.
- Access to Loans: LMI can enable borrowers who might not otherwise qualify for a loan to secure financing.
Considerations and Limitations
- Non-Transferable: LMI is non-transferable. If you refinance or switch lenders, you may need to pay for LMI again unless your LVR has decreased below the 80% threshold.
- No Direct Benefit to Borrower: Unlike other types of insurance that protect the policyholder, LMI protects the lender. Borrowers do not receive any direct benefit or coverage from LMI.
- Costly for High LVR Loans: The cost of LMI can be substantial, especially for borrowers with small deposits, adding to the overall cost of the home loan.
How can I avoid paying LMI?
Here are several effective strategies to avoid paying Lenders Mortgage Insurance:
Save A Larger Deposit
Saving at least 20% of the property’s purchase price for your deposit can help you avoid the need for LMI. This not only reduces your loan amount but also demonstrates to lenders that you are a low-risk borrower.
Have A Guarantor
A guarantor, often a close family member, can use their property as additional security for your loan. This reduces the lender’s risk, allowing you to bypass the LMI requirement even if you have a smaller deposit.
Use Government Grants And Schemes
Some government grants and schemes are designed to help first-time homebuyers or those in specific circumstances boost their deposit. Taking advantage of these can help you reach the 20% deposit threshold more quickly, avoiding LMI.
Professional LMI Waivers
Certain professions, such as doctors and accountants, may be eligible for LMI waivers with specific lenders, due to their perceived low risk. Check if your profession qualifies for any LMI discounts or waivers.
Apply for A home loan
Our expert mortgage brokers have in-depth knowledge about Lenders Mortgage Insurers and the guidelines they use to assess loan applications. Please call us on 0415571893 or enquire online to discuss your situation with one of our brokers, today!
