Lender’s Mortgage Insurance or LMI is a one-off insurance premium that the home buyer might be required to pay upon taking out a new home loan.

You are only required to pay LMI if you are wanting to borrow a high percentage of the overall value of the property.

Typically, when you want to buy a property, a bank will ask you to come up with a 20% deposit. It is still possible to get a home loan if you cannot quite come up with a deposit of that size, however, you are then likely to fall into LMI territory.

The first thing to note about LMI is that it is put in place to protect the bank or the lender, and not you. Many borrowers think that Lender’s Mortgage Insurance protects them, just like home insurance. However, LMI protects the lender in the event that the borrower cannot keep up with the repayments, and they are forced to sell the property, or in the event of a fall in the value of the property.

Example: If you want to buy a property that is worth $500,000, a bank will ask for a 20% deposit which is $100,000.

If you are only able to contribute $50,000 or 10%, that means the bank is taking on more risk. They are then required to get you to pay Lender’s Mortgage Insurance.

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How much is Lender’s Mortgage Insurance?

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Lender’s Mortgage Insurance differs, depending on how much deposit you are able to contribute.

If you can put down an 18% deposit, then you will have to pay LMI, but it will be a lot less than if you only pay a 5% deposit.

The amount of LMI will also vary according to other factors, including the type of job you have, whether you are an investor or owner-occupier, the state and area you are choosing to buy in, the duration of the loan and also the rate of the stamp duty.

As a general rule, you should expect to pay $5,000 to $10,000 for LMI, and even more for higher-priced properties.

Two of the major providers of LMI are Genworth and QBE. You can use an LMI calculator to get a clear idea of how much you might have to pay in LMI.

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Example:

$500,000 Property Value
$450,000 Loan Amount
$50,000 Deposit (10%)

For a First Home Buyer in NSW on 30 Year Loan Term

Upfront LMI premium (including GST) = $ 8,679.89, excluding stamp duty

Based on Genworth LMI Calculator

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How to avoid LMI

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The most obvious way to avoid paying LMI is to come up with at least a 20% deposit.

However, some lenders and insurers will waive LMI, based on your profession. Typically, professionals like doctors, accountants or lawyers are able to avoid LMI, as their careers are deemed low risk by lenders and insurers.

First home buyers are also able to avoid LMI, through the use of a guarantor. Often, the parents of the borrower act as guarantor. They might put up equity in their own home, to effectively increase the deposit, which removes the need for LMI.

If you cannot avoid LMI, it is also possible to incorporate the cost thereof into your home loan, which means you can pay it back over the course of the loan.

It is also worth noting that while LMI is a one-off upfront premium, if you choose to refinance in the future and your equity is under 20%, you will be required to pay the LMI premium again.

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