Lenders Mortgage Insurance for Australians

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What Is Lenders Mortgage Insurance and How Does It Affect Australians?

If you’re in the process of buying a home, chances are that you’ve heard about Lenders Mortgage Insurance. LMI is a big part of many home purchases and enables buyers to access home loans while minimising risk to the lender. However, LMI can often be expensive, so it’s important to understand exactly how it works and when you’ll need it.

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    What is Lenders Mortgage Insurance and how does it work?

    Lenders Mortgage Insurance, commonly called LMI, is an insurance policy that a homebuyer pays to protect the lender in the event of a default. If an LMI policy is in place, the lender can feel safer issuing a home loan to a higher-risk borrower. The borrower can pay for their policy upfront or can fold it into their home loan.

    While it seems counterintuitive for a borrower to pay for insurance that protects the other party, the borrower benefits as well. When the loan risk is lowered by the presence of an LMI policy, there is easier access to lending and more borrowers can be approved for home loans who otherwise would not.

    When is Lenders Mortgage Insurance required?

    The threshold for an LMI requirement is based on your Loan-to-Value Ratio, or LVR. If you buy a $500,000 home and pay a $50,000 deposit, your deposit is 10% of the value, meaning your loan is 90% of the value—giving you an LVR of 90%. Any LVR over 80% will generally require an LMI policy. Therefore, saving up for a larger deposit can help you circumvent LMI requirements.

    How much does it cost to get Lenders Mortgage Insurance?

    LMI is calculated as a percentage of the loan amount and typically ranges around 0.2% to 2% of the loan amount. This translates to several thousand dollars on top of the loan principal, but remember that LMI costs typically get spread out across the entire loan. Using the same example as before, a $450,000 loan on a $500,000 home would make the LMI cost around $5,000 to $10,000.

    What affects the cost of Lenders Mortgage Insurance?

    As you can tell based on the wide variability in cost, there are many factors that affect the price of LMI. These include:

    • Loan amount: A more expensive loan bears more risk for the lender, since they stand to lose more money.

    • Deposit amount: A higher deposit demonstrates the buyer’s financial stability and commitment to the home.

    • Property purpose: Lenders view investment properties as riskier than residential properties.

    • Employment status: Full-time employees with stable work histories are perceived as more dependable.

    • Choice of insurer: Like with any product or service, prices vary based on the provider and their offers.

    • Type of loan: Some higher risk loans, like a low-doc loan, will require LMI even if there’s a larger deposit.

    Stamp duty for a Lenders Mortgage Insurance premium

    Your LMI premium will likely be liable to stamp duty, and this will be a separate stamp duty from your main property purchase. In some instances, this duty is waived under a home buyer concession scheme, namely for first home buyers.

    Lenders will automatically add this stamp duty to the premium, as well as any GST, and they will also subtract any applicable Reduced Input Tax Credit (RITC). This table describes each state’s stamp duty as a percentage of the LMI premium:

    StateStamp Duty
    ACT6%
    NSW9%
    QLD9%
    VIC10%
    WA10%
    NT10%
    TAS10%
    SA11%

    How can I minimise or avoid Lenders Mortgage Insurance costs?

    Given how expensive a home purchase is, saving money on LMI can be a great help. There are different approaches to cutting LMI costs, depending on your financial circumstances. Below are some of the most common strategies:

    • Start with a larger deposit Depending on your current savings and market conditions, you might be better off waiting a while and trying to save up for a bigger deposit to reach the 20% threshold for not needing LMI.

    • Compare multiple lenders While the 20%-80% rule is pretty common in the industry, certain lenders may have special offers for certain buyers or might be more willing to negotiate on costs or other LMI exemptions.

    • Having a guarantor If your credit history is too short or too inconsistent, your loan application could be strengthened by a guarantor who will back the loan. This places a lot of risk on the guarantor and should be considered thoughtfully.

    • Use government assistance Many schemes such as the First Home Guarantee, Family Home Guarantee, and Regional First Home Guarantee enable buyers to pay just a 5% or even 2% deposit and not be subject to LMI.

    • Working in specific professions Occupations such as doctors, accountants, or lawyers are seen by lenders as a stable and reliable source of income. Some lenders will exempt these borrowers from LMI with only a 10% deposit.

    Pros and cons of Lenders Mortgage Insurance

    Before making any major financial commitment, it’s important to fully go through both the advantages and the disadvantages. Here’s what you should know before signing a contract that incorporates LMI.

    Pros

    • You will be able to obtain a home loan without having to pay a huge deposit.
    • If homes get pricier in the future, using LMI to buy faster can save you money.
    • LMI can be wrapped into your loan, reducing your upfront costs for the purchase.

    Cons

    • LMI is an additional expense that makes the loan more costly in the bottom line.
    • A low-deposit home loan means more borrowed money and greater interest.
    • LMI is non-refundable and must be paid again if you refinance or sell the home.

    Lenders Mortgage Insurance FAQ

    What’s the difference between LMI and loan protection insurance?
    Both are paid by the borrower, but LMI covers the lender in the event of nonpayment, whereas loan protection insurance covers the borrower in case of circumstances like unemployment, injury, or illness.
    Is LMI tax-deductible?
    Yes, you can deduct LMI from your taxes as a borrowing expense per the ATO.
    Do I have to find my own LMI?
    Not as a rule. Most of the time, the lender will handle the LMI and work with their preferred providers. You can ask your lender which provider they work with and whether they’ll accept a different provider.
    What is a loan-to-value ratio?
    The loan-to-value ratio, often abbreviated as LVR or LTV, is the amount of money being borrowed in comparison to the total value of the property. A higher LVR means that a larger portion of the home purchase had to be covered with borrowed money.
    If I refinance my home loan, do I have to pay LMI again?
    Yes, an LMI policy applies to a specific loan and cannot be transferred. If your refinanced loan has an LVR greater than 80%, you will most likely end up needing to use LMI again. It is rare to see a discount, refund, or reimbursement for any kind of prior financing. The best way to save money with refinancing is to make sure that your LVR stays below 80%.

    Bottom line takeaways for Lenders Mortgage Insurance

    Lenders Mortgage Insurance can be confusing, but it’s an important financial tool and one that many Australians have successfully used to access home financing without a large deposit. Learning about the ins and outs of LMI helps you borrow money in strategic ways and make your first home purchase more affordable. Equipped with this knowledge, you can avoid common home purchase pitfalls and get the very best deal.