Lenders mortgage insurance (LMI)

How does LMI help me? 

LMI helps people buy homes. If you want to buy a home and otherwise meet lender requirements, but do not have a substantial deposit (usually 20% plus stamp duty), it can be difficult to find a lender who will lend to you. If you are in this situation, LMI helps make it easier for you to obtain mortgage finance. LMI does this by reducing the risk of loss to the lender if you stop paying your loan repayments. Because LMI reduces the risk for the lender, it makes them more likely to lend to you with a reduced deposit.

Example

• If you want to buy a house that’s worth $500,000, lenders typically require you to have a deposit 20% of the property’s value plus Stamp Duty. If you’ve only saved $50,000, but have sufficient income to support the loan, you may be able to take advantage of Lenders Mortgage Insurance. Lenders will then offer you the $450,000 needed to buy your new home. 

Things you should know

• LMI is designed to protect the bank/lender, not you (the borrower), against the risk associated with providing you with a low deposit home loan and the potential loss they may incur if you’re unable to repay your home loan.
• If the borrower defaults on their loan and the sale of the property doesn’t equal the unpaid value of the mortgage, lenders can claim on the LMI policy to make up the difference.
• If your lender requires you to take out LMI, it can typically be paid upfront or capitalised into (added to) your home loan. If the LMI amount is capitalised into your loan, you will pay interest on this money along with the rest of your loan. LMI premiums are typically non-refundable which means if you switch your loan to another provider in the future, you won’t be able to transfer your LMI to another lender. Depending on the situation, you may have to pay for a new policy through the new lender.

If you’re looking to avoid paying LMI but you don’t have enough of a deposit saved up, you may be better off not entering the housing market just yet, and waiting until you have saved up the 20% deposit that is generally required to avoid paying LMI. You could also consider the First Home Loan Deposit Scheme (if eligible), or get support from a Guarantor.

Our Finance Consultants can help explain when Lenders Mortgage Insurance may apply to your home loan, and how much it will cost.