What’s Lender’s Mortgage Insurance (LMI)?

Lender’s Mortgage Insurance (LMI) in Australia is a type of insurance that protects the lender, not the borrower, in case the borrower defaults on their home loan repayments. LMI is typically required when a borrower has a deposit that is less than 20% of the property’s value.

Here’s an overview of how LMI works and why it’s important:

1. When LMI is Required

• LMI is usually necessary when your loan-to-value ratio (LVR) is greater than 80%. The LVR is the percentage of the property’s value that you’re borrowing. For example, if you are buying a property worth AUD 800,000 and have a deposit of AUD 100,000 (12.5%), you are borrowing 87.5% of the property value, which would likely trigger LMI.

2. Who Benefits from LMI

• Lender Protection: LMI protects the lender, not the borrower. If the borrower defaults on their loan and the property is sold, but the sale does not cover the remaining loan balance, the LMI pays the lender for the shortfall.
• Borrower Flexibility: While LMI protects the lender, it allows borrowers to access a home loan with a lower deposit (often as little as 5-10%) instead of waiting to save a 20% deposit. Without LMI, banks would likely be less willing to lend to buyers with smaller deposits.

3. How LMI is Calculated

• Based on Loan Amount and LVR: The cost of LMI varies depending on the amount borrowed, the size of the deposit, and the lender’s specific policy. The higher your LVR (i.e., the smaller your deposit), the more expensive the LMI.
• Range of Costs: LMI can range from a few thousand dollars to tens of thousands of dollars, depending on the loan amount and the deposit size.

4. How LMI is Paid

• Upfront Payment or Added to Loan: LMI is typically a one-off premium. It can be paid upfront by the borrower at settlement, or, in many cases, it can be added to the loan amount and repaid over the life of the loan (this option increases the total loan amount and, consequently, the interest paid over time).

5. Is LMI Refundable?

• LMI is generally non-refundable. If you pay off your loan early or sell the property, you usually cannot claim back any part of the LMI premium.

6. Alternatives to LMI

• Guarantor Loan: Instead of paying LMI, some borrowers opt for a guarantor loan, where a family member (often a parent) uses their property as security to cover the gap in deposit. This avoids LMI but puts the guarantor’s property at risk if the borrower defaults.
• Save a Larger Deposit: To avoid LMI altogether, you can aim to save at least 20% of the property’s value as a deposit.

7. First Home Buyer Considerations

• Government Assistance: Some government programs, such as the First Home Loan Deposit Scheme (FHLDS), can help first-time home buyers avoid LMI even with a deposit of less than 20%. This scheme allows eligible first-time buyers to purchase a home with as little as 5% deposit, with the government acting as a guarantor.