When Is Lenders Mortgage Insurance (LMI) Needed?
Lenders mortgage insurance (LMI) is a type of insurance that protects the lender, not the borrower, in case the borrower defaults on a home loan. In Australia, LMI is typically required when you have a high loan-to-value ratio (LVR), which means your deposit is less than 20% of the property’s value. In other words, if you are borrowing more than 80% of the property’s value, you will usually need to pay LMI.
How Is LMI Calculated?
The cost of LMI is generally based on the size of your loan and your LVR. The higher the LVR, the higher the risk to the lender, so the LMI premium tends to be larger. While the exact formula varies between lenders and insurers, the premium is usually a percentage of the loan amount, and it can be a significant upfront cost. It is important to note that LMI is a one-time cost, not an ongoing fee, and it is typically added to your loan balance.
Strategies to Reduce LMI Costs
If you have a high LVR and are looking to reduce LMI expenses, there are several strategies you can consider. One effective method is to take advantage of professional discounts. Some lenders offer reduced or waived LMI for certain professions, such as doctors, lawyers, accountants, and other high-income or low-risk occupations. These professional packages can significantly lower your upfront costs.
Another strategy is to save a larger deposit to bring your LVR below 80%, but this is not always feasible. Alternatively, you could consider having a guarantor, which is someone who uses their own property as security to help you reach the required equity. Refinancing later when your LVR improves is also an option, though it does not reduce the initial LMI cost.
Before deciding on a strategy, it is wise to speak with a mortgage broker who can explain the options available to you and help you compare different lenders’ policies.
Frequently Asked Questions
Does LMI protect me as a borrower?
No, LMI protects the lender, not you. It covers the lender’s losses if you default on the loan.
Can LMI be included in the loan amount?
Yes, in many cases you can add the LMI premium to your home loan, rather than paying it upfront.
Are professional discounts always available?
Not all lenders offer professional discounts, and eligibility varies. It’s best to ask your mortgage broker about which lenders provide these benefits.
Is LMI required for refinancing?
LMI may apply when refinancing if your LVR is above 80% and you are not taking out a new loan with the same lender. The rules vary, so it’s important to check with your lender or broker.