Table of Contents
- LMI Calculator
- What is LMI?
- How is LMI calculated?
- What is the purpose of LMI?
- Who is insured?
- Do I have to pay the whole LMI fee upfront?
- Can you get a refund on lenders mortgage insurance?
- Can I get LMI which protects me, not the lender?
- How can I avoid paying LMI?
- Does paying an LMI fee create any restrictions for me in the future?
What is LMI?
LMI stands for Lenders Mortgage Insurance.
Most home loan lenders require borrowers who have less than a 20% deposit to take out LMI.
LMI is a one-off fee paid to an insurer, such as Genworth. The LMI fee is paid at settlement.
LMI helps to protect the lender in the event of a borrower defaulting on their mortgage.
LMI helps people borrow at an interest rate which is comparable to someone who has a larger deposit.
How is LMI calculated?
The main variable influencing the LMI fee is the loan to value ratio (LVR).
A 20% deposit means the LVR is 80% and attracts no LMI fee.
A 15% deposit means the LVR is 85% and will attract an LMI fee.
A 10% deposit means the LVR is 90% and will attract an LMI fee.
A 5% deposit means the LVR is 95% and will attract an LMI fee.
There are other smaller variables influencing the LMI fee such as:
- existing property
- new property
- owner occupier
That said, the main factor influencing the LMI fee is LVR.
What is the purpose of LMI?
The purpose of LMI is to help protect the lender in the event of a borrower defaulting on their home loan.
For example, say someone buys a property for $500,000 with a 10% deposit and then a few years later goes into default. The lender sells the property. Let’s say the outstanding home loan when the property is sold is $450,000.
Let’s say the property sells for $440,000 and after real estate fees and costs there is $430,000 left. If the lender takes the $430,000, they are still short $20,000, because the home loan is $450,000.
The lender would then make a claim to recover the outstanding amount from the LMI insurer.
Do I have to pay the whole LMI fee upfront?
The whole LMI fee needs to be paid at settlement.
However, some lenders allow borrowers to add the LMI fee to the loan. This is called capitalisation. If the LMI fee is capitalised, it’s added to the home loan and paid off as you pay your home loan off.
The LMI fee can also be paid from your deposit and not added to the loan.
Can you get a refund on lenders mortgage insurance?
In some instances, a partial refund may be possible if the loan is repaid within two years of purchase. This needs to be clarified with the individual lender and insurer.
Is LMI the same as mortgage protection insurance?
If mortgage protection insurance refers to an insurance which protects the borrower, then it’s not LMI.
An insurance worth considering is income protection insurance. Income protection insurance can cover up to 75% of your monthly income if you can’t work due to injury or illness.
Can I get LMI which protects me, not the lender?
LMI is not offered to borrowers.
Income protection insurance and life insurance are two types of insurance which can help borrowers.
How can I avoid paying LMI?
Save a full 20% deposit plus transaction costs.
Does the LVR make any difference to how big the LMI fee is?
Yes. The LVR is the main factor in how much the LMI fee will be.
The higher the LVR, the higher the LMI fee.
There is a sweet spot for LVR, which it makes sense to go up to but not go over. Contact a Dallett accredited mortgage broker to show you what that LVR is.
Does paying an LMI fee create any restrictions for me in the future?
One restriction is if you want to refinance to a more competitive home loan interest rate in the future.
If your home loan is still over 80% of the value of the property, the new lender will require you to take out LMI again. Having to take out LMI a second time, in most cases, will cancel out the financial benefit of refinancing.
One way to offset the above risk is to pay less than market rate for your property when you purchase it. It’s worth talking to your local buyers advocate about how this may be possible.