Everything you need to know about Lenders Mortgage Insurance (LMI)

What does Lenders Mortgage Insurance (LMI) mean for Australian homebuyers?

LMI protects the lender against future losses

Lenders Mortgage Insurance: The Sometimes Necessary Evil

Lender’s Mortgage Insurance, or (LMI) is a form of insurance that protects the banks in the event the borrower is unable to make repayments on their home loan. This insurance is not be confused with regular mortgage insurance that’s made available to borrowers looking to protect themselves against, sickness, loss of job, and worst case, death.

In Australia, LMI applies to all home loan borrowings with a Loan-to-Value Ratio (LVR) higher than 80% (Self-employed and special situations start at 60%). The LVR is simply the percentage of the total property value that you have borrowed from the bank. For instance, if you purchased a home valued at $500,000 with an $150,000 deposit, you would only be borrowing $350,000 which gives you an LVR of 70%. As this falls under 80%, you would not be required to pay the Lenders Mortgage Insurance. However if you only had, say, $50,000 saved aside for a deposit you would be borrowing $450,000 from the bank giving you an LVR of 90%. This would require you to pay LMI.

Many would-be mortgage applicants would tend to naturally wait to save up a large enough deposit in order to avoid paying LMI. But doing so isn’t always in your best interest. For example, the longer you take to save up in order to avoid paying mortgage insurance , the higher the risk of property prices going up over time – a dog chasing its own tail. If you are a first homebuyer, you may qualify for a reduction in LMI expenditure.

QBE and Genworth are two of Australia’s leading Mortgage Insurance providers. As for how much Lenders Mortgage Insurance a borrower would pay, it is difficult to create a generic table containing rates for different borrowing tiers because the amount for LMI depends on a range of variables that cannot be ascertained in advance. Each case has to be assessed on its own terms. The table below is for illustrative purposes only to give you a rough idea:

<$300K $300K – $500K $500K – $750K $750 – $1M
80% 0.44% 0.55% 0.77% 0.85%
85% 0.77% 0.98% 1.37% 1.52%
90% 1.60% 2.09% 2.92% 3.24%

(Source: http://www.peachhomeloans.com.au/oncosts.htm)

The better way to determine exactly how much LMI you might pay is by using one of the following two Online LMI Calculators:

QBE – http://www.qbelmi.com/pg-servicing-capacity-calculator.seo

Genworthhttp://www.genworth.com.au/borrower-centre/homebuyer-tools/lmi-premium-estimator

Having learnt about LMI, when you feel you are ready to find the best home loan deal get in touch with SwitchMyLoan.com.au on 1300 307 155.

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  • Hayden

    Just a query – I know these are not set in stone percentages – BUT, if you have to have mortgage insurance – is the % calculated on the LOAN amount or the total purchase price?