Understanding Lenders’ Mortgage Insurance (LMI) and How to Avoid It
If you’re taking out a home loan, you may have come across Lenders’ Mortgage Insurance (LMI) as a requirement. For first-time buyers, it can be a bit confusing, and the cost might come as a surprise.
So, what exactly is LMI, and is there a way to bypass it?
What is LMI?
Lenders’ Mortgage Insurance (LMI) is a one-time insurance premium required by lenders when a borrower has less than a 20% deposit. If you’re borrowing more than 80% of the property’s value, the lender perceives a higher risk, and LMI serves as a safeguard for them in case of loan default.
If you’re unable to meet your loan obligations and the sale of your property doesn’t cover the remaining balance, the LMI provider will step in to cover the shortfall.
Many borrowers wonder who LMI truly benefits and how it works.
Who Does LMI Protect?
LMI is designed to protect the lender—not the borrower. If a borrower defaults and the sale of their property doesn’t fully cover the outstanding debt, LMI ensures the lender recovers the remaining amount.
Since a smaller deposit means a greater risk for the lender, the cost of LMI is passed on to you, the borrower. Once applied to your loan, LMI coverage remains in place for the full loan term, which can extend up to 30 years.
How Much Does LMI Cost?
LMI premiums are typically added to your total loan amount rather than being paid as a separate fee. While it may seem like you’re not paying for it upfront, the cost is factored into your overall mortgage.
The cost of LMI varies based on different factors, meaning no two borrowers will pay the same premium. Key influences on your LMI cost include:
- Loan Amount: The larger your loan, the higher the perceived risk, which can result in a higher LMI fee if your deposit is below 20%.
- Deposit Size: A smaller deposit increases risk, leading to a higher LMI charge. Some lenders, however, offer special loans that require only a 5% deposit, though these come with LMI fees.
Speaking with a mortgage expert can help you determine the best loan-to-value ratio (LVR) to minimise your LMI costs over time.
Can You Avoid Paying LMI?
Given the additional cost, many borrowers look for ways to avoid LMI. While not everyone will qualify for an exemption, there are a few legitimate ways to sidestep this expense:
- Government Grants: Some government programs, like the First Home Owner Grant and First Home Guarantee, can help borrowers avoid LMI. These programs often allow for reduced deposits while covering LMI costs in certain circumstances.
- Guarantor Loans: If a close family member acts as a guarantor, some lenders may waive the LMI requirement. A guarantor takes on financial responsibility for the loan if the borrower fails to make repayments.
- Choosing the Right Lender: Not all lenders have the same policies. Some offer LMI discounts, and others may provide temporary waivers. Certain professions, such as doctors, lawyers, accountants and other medical professionals may also qualify for special LMI exemptions where they can borrow up to 95% without paying LMI.
Final Thoughts
Lenders’ Mortgage Insurance exists to protect lenders, not borrowers, in the event of loan default. However, it plays a crucial role in the home loan industry by allowing buyers to enter the market with a smaller deposit rather than waiting years to save 20%.
If you’re exploring home loan options and want to understand how LMI affects your borrowing power, speak with an experienced mortgage broker. At Linton Finance, we can help you navigate LMI costs and find strategies to minimise or eliminate them, making homeownership more accessible.
