Lenders Mortgage Insurance

When applying for a home loan, lenders mortgage insurance (LMI) is one of those additional costs that can have a big impact on your budget. Our mortgage brokers use their extensive experience and access to a wide range of lenders to get the best deal on LMI for you. Contact us today to start your home loan journey.

What is lenders mortgage insurance?

Lenders mortgage insurance (LMI) is a once-off premium that is added to your home loan, typically when you are borrowing more than 80% of the value of the property.

For example, LMI may be applied if you are needing to borrow $500,000 to purchase a home, but have a deposit of less than $100,000 (less than 20% of the value of the property).

What is the purpose of lenders mortgage insurance

LMI is designed to protect a lender from financial loss in the event that you, the borrower, defaults on your home loan and there is a ‘shortfall’ when the property is sold.

What is a shortfall?

A shortfall occurs when the sale of the property does not cover the outstanding amount owing to the lender. For example, as you may still owe $700,000 to the lender but your property sells for $650,000. The shortfall in this case is $50,000. The LMI insurer will then pay the lender for the shortfall in accordance with their agreement.

Who provides lenders mortgage insurance?

LMI is arranged by the lender and paid by the borrower at settlement or through their home loan. Each lender will have their own policy regarding LMI.

What does lenders mortgage insurance cover

LMI only protects the lender and is paid for by the borrower. It is often confused with Mortgage Protection Insurance which protects a borrower in the event they are unable to make their home loan repayments.

How can LMI benefit borrowers?

LMI can help some Australians to get a home loan when they would otherwise be unlikely to get approved. With LMI, borrowers who are struggling to save a 20% deposit, or who would usually be classed as high risk, have greater access to owning their first home. Because lenders are able to offset the financial risk to the LMI insurer, they are able to lend to a wider range of borrowers.

What is the cost of lenders mortgage insurance?

Knowing the cost of LMI for you is important to understand before you sign any loan agreement. You may find that you prefer to wait and save more for your deposit before you apply, or you may be happy to proceed. LMI is calculated slightly differently between lenders, but we can give you a general guide on how it is calculated below.

How is LMI calculated?

The cost of LMI is calculated using the value of your property, the size of your deposit, and the total loan amount.

While there are online LMI calculators available that can help you estimate the amount you may need to pay, a mortgage broker can compare multiple lenders and their LMI policies on your behalf.

When is lenders mortgage insurance payable

LMI is usually payable either upfront upon settlement or by adding it to the loan (this is called capitalisation of LMI).

LMI capitalisation means that the amount owing for LMI will be added to your overall loan amount. For example, if you need to borrow $580,000 and the LMI premium is $20,000, you can add this amount to your overall loan amount.

$580,000 + $20,000 means that the total amount borrowed is then $600,000.

LMI and refinancing your home loan

Because LMI is lender-specific, if you refinance your home loan to a different lender and need to borrow more than 80% of the value of the property, you will likely need to pay LMI again.

Is LMI refundable?

Generally, LMI is not refundable but if you repay your loan within the first two years you may be eligible for a partial refund. However, it will depend on your lenders LMI policy.

To determine if you are eligible for a partial refund, contact your lender directly or consider consulting a mortgage broker.

How to avoid LMI

If you’re looking to reduce the cost of the LMI premium or if you’re looking to avoid LMI entirely, there are a few options available.

Save a bigger deposit

Typically, LMI will apply when your deposit is less than 20% of the value of the property. By committing to saving a larger deposit before you apply for a loan, you could reduce the amount of your LMI premiums, or possibly even avoid LMI altogether.

Use a guarantor

Providing they have enough of their own equity to a 20% deposit, using a guarantor loan could help you avoid LMI.

The First Home Guarantee (FHBG)

The First Home Guarantee (FHBG) is a government initiative helping first home buyers to get into the property market sooner. With this initiative, eligible home buyers are able to purchase a home with as little as 5% deposit and avoid paying LMI.

Compare lenders

Every lender has their own LMI policy and requirements, and some lenders may not require a full 20% deposit. A mortgage broker can do the hard work for you by comparing lenders and their LMI policies to find the most suitable option for your circumstances.

Oceania’s experienced mortgage brokers have access to a wide range of lenders and can negotiate on your behalf to get the best deal on LMI for you.

Consider a cheaper property

If you’re struggling to save up for a deposit but still eager to get into the property market as soon as possible, opting for a more affordable property can help.

Oceania Finance is here to help

If you’re applying for a home loan or thinking of refinancing, our trusted mortgage brokers are ready to help. We use real industry experience and access to a wide range of lenders to get you the best rates and terms for your individual circumstances.

Contact us today for more information.