Lenders mortgage insurance (LMI) explained

LMI is a type of insurance applied by lenders to homebuyers taking out home loans with a loan-to-value ratio (LVR) of more than 80% (meaning their initial home loan deposit is less than 20% of the property value).

Lenders typically view a higher LVR as indicative of higher risk, so an LMI policy provides the lender with a degree of financial protection in line with the perceived risk of lending you money.

LMI is designed to protect the lender against the losses they could incur if you default on your home loan repayments. It does not protect you, the homeowner, and it cannot be transferred from one lender to another – meaning if you refinance or switch lenders with an LVR higher than 80%, you may have to pay LMI in full all over again.

It’s worth noting that your saved deposit will usually be required to cover the various upfront costs associated with buying a house, including stamp duty and conveyancing fees. So, when you’re calculating your homebuying costs and the size of your deposit relative to the size of your home loan, be sure to factor in those upfront costs.

The lender will calculate your LVR and determine whether or not you will be required to take out LMI as part of the home loan application process. Your LVR and whether you’ll need LMI may be a factor in the lender’s decision to approve or deny your home loan application.

If you do get approved for a home loan on the condition that you pay LMI, there are a couple of ways you can do so, including:

• Paying your LMI upfront, typically at the time of loan settlement
• Capitalising it (i.e. adding it to your home loan balance) and paying for it through your regular mortgage repayments over the loan term.

The decision to pay your LMI upfront or capitalise it into your home loan is one you’ll have to make with the help of your lender or broker based on your financial circumstances. However, LMI is typically capitalised into to your loan; meaning any deposit money you have saved can be directed towards your purchase, resulting in a lower loan requirement. Talk to one of our lending specialists, and they’ll be able to any questions you may have and discuss your specific requirements.

It’s also worth noting that several lenders now offer borrowers different options for managing their LMI costs.

If you suspect you may end up having to pay LMI based on the current size of your deposit, you may want to explore your LMI payment options by talking to our Home Loan Specialist team.

There’s no one-size-fits-all answer for how much LMI costs, as several factors will determine the amount of LMI you may pay. Generally, the size of your deposit and how much is being borrowed will have the greatest impact on your eventual LMI premium.

The table below demonstrates the typical upfront LMI premiums you could end up paying as a first home buyer based on different deposit and home loan amounts.

You can view what your LMI costs might look like as a non-first home buyer further down on the page.

• Your LVR. The smaller your deposit amount relative to the size of your proposed home loan, the higher your LVR will be, and subsequently, the higher your LMI fee is likely to be.
• The value of the property. Your property’s purchase price will also influence how much you’ll be required to pay in LMI. There’s a big difference between a 5% deposit on a $500,000 home loan and a 5% deposit on a $1,000,000 home loan – the latter home loan requires the lender to take on a great deal more risk.
• The LMI provider your lender uses. Premiums can vary between private mortgage insurers and lenders who offer LMI themselves or through one of the two most common LMI providers, Helia and QBE. So, you could very well pay a different amount of LMI on the exact same home loan amount through different lenders.
• The loan purpose. Some financial institutions might apply different LMI rates depending on what you want to use the property for (i.e. an investment property or an owner-occupied property that you plan to live in).
• Whether you’re a first home buyer. First home buyers may be offered a discount on their LMI depending on the lender they’re with. As we’ll explain below, they can also apply to have their LMI waived entirely through various government programs.

No, LMI isn’t the same as mortgage protection insurance (MPI). LMI is protection for the lender if you can’t pay your loan back, whereas MPI is a type of income protection insurance which can protect the borrower (you) against unexpected events such as involuntary redundancy, disability or death.

In the case of such an event and if you meet the criteria, your MPI provider will compensate you in the form of either a lump sum or ongoing payments, which you can use to help cover your regular home loan repayments.

LMI reduces the risk you pose to your lender, but it can also benefit you as a borrower. For example, it may help you enter the property market earlier with a smaller deposit, sometimes as small as 5%.

This opens up a wide range of benefits for you, including:

• Entering the housing market sooner
• Buying into a better location
• Buying a larger house
• Having greater financial capacity for renovations.

Of course, this can also come with risks; you’re borrowing more, so your mortgage repayments will be higher as a result and an interest rate increase could put you under mortgage stress.

So, while LMI can help you enter the property market sooner, you’ll need to think long and hard about whether you’re comfortable signing up for larger home loan repayments and higher risk.

The only similarity between LMI and stamp duty is that they can both be paid as an upfront homebuying cost. Stamp duty is a mandatory tax imposed by state and territory governments on the transfer of a property’s legal title from one party to another as the result of a sale, whereas LMI is a lender-imposed premium that not all borrowers will have to pay.

Stamp duty on a property can also be thousands, if not tens of thousands, of dollars. Unlike LMI, however, it’s not determined by your deposit size, but rather:

• The state or territory you’re buying in
• The property value
• Whether you’re an investor or an owner-occupier
• Whether you’re a first home buyer
• Whether the house is newly built, or if you’re buying vacant land

If you want to buy a home now and don’t have a 20% deposit, you’ll most likely have to pay LMI, regardless of whether you think you ‘need’ it or not.

So, strictly speaking, no one ‘needs’ LMI – but some borrowers may decide it’s worth the added cost based on their specific borrowing circumstances, and some may decide it’s not.

Consider two different prospective homebuyers:

• Jamie is looking to buy a home as soon as possible because he’s currently renting, and he feels that the sooner he buys a house, the sooner he can stop ‘throwing away’ money in the form of rent payments.
• Trudy wants to buy a home at some point in the future, but currently lives with her parents and isn’t in a hurry to buy, preferring instead to wait and grow her saved deposit.

Jamie may decide that LMI is a cost he’s willing to bear, as the money he’ll spend on LMI is dwarfed by the money he’d put towards paying rent in the time it would take him to save a larger deposit.

Trudy may decide she doesn’t want to have to pay LMI and is happy to continue living with her parents while she works towards saving up a larger deposit.

Whether you decide to spend time saving a larger deposit or commit to borrowing with a higher LVR and paying LMI, your decision should be decided based on your personal circumstances, goals and timeframes.

If you’d prefer not to pay LMI, there are a range of options available to homebuyers looking to avoid or minimise their LMI. These include:

• Saving a bigger deposit. A bigger deposit means a lower LVR, and the lower your LVR the better when it comes to LMI. Even if you can’t save your way to a 20% deposit, having 10% instead of 5% will generally help you pay less in LMI. So, if you’re happy to defer buying, simply saving more can be one of the easiest ways to avoid or reduce your LMI.
• Using a family member as a guarantor. A guarantor is someone who’ll ‘guarantee’ that your home loan repayments will be met by taking on responsibility for them if you’re unable to make the repayments yourself. A guarantor will typically stump up the equity they have in their own home as the guarantee. Having a guarantor for your home loan may be enough to avoid paying LMI for some lenders, but it’s worth considering the risk you’d be taking by asking the would-be guarantor to shoulder on your behalf should you have any trouble repaying the loan
• Applying through the First Home Guarantee (FHBG). This Australian Government initiative helps eligible first-time homebuyers build or purchase a new house with a deposit as low as 5%. The government then guarantees the other 15%, which means eligible homebuyers can reach the 20% deposit threshold and avoid having to pay LMI on their home loans.
• Look for LMI offers. Some lenders have generous LMI offers available to select borrowers; some may offer LMI for $1 for eligible homebuyers, and others may discount it for certain types of borrowers such as accountants or solicitors, as well as workers in the medical industry such as nurses and doctors. Be sure to do your own research and check the lending criteria of any lender you’re considering.

In most cases, LMI is non-refundable; however, you may be entitled to a partial refund in certain circumstances. For example, LMI premiums may be partially refunded if the risk decreases and the home loan is repaid within the first one to two years, with all repayments having been made on time.

Any partial refund will be at the discretion of the lenders.

It’s a good idea to chat to our home loan experts or a lender and read the home loan key fact sheets before taking out a loan, to make sure you’re aware of the terms and conditions regarding LMI.

When it comes to paying LMI on a home loan, the same rules generally apply to refinancing. If you don’t have 20% of the home’s value in the form of cash or existing equity, you may have to pay LMI.

LMI can’t be transferred from one lender to another, and you may find yourself paying more in LMI on your new home loan if your LVR ends up being higher. To avoid this, it’s sometimes better to wait until you’ve built up enough equity in your home to ensure your new home loan will have an LVR of 80% or less.

It’s important to stress that the answer to this question will depend on whether you choose to pay your LMI upfront or to capitalise it into your home loan. If you choose to pay it upfront, you won’t pay it monthly (because it’ll already be paid for).

However, if your lender will let you capitalise your LMI into your home loan, you’ll be paying it off via your regular home loan repayments, which could be monthly depending on the repayment frequency you and your lender have agreed on.

Lenders will generally give you the option of making weekly, fortnightly or monthly repayments, and the repayment frequency you choose will determine how you’re repaying your LMI.

The table below demonstrates the LMI costs you might incur at different deposit sizes as a non-first home buyer based on the median dwelling values of state and territory capital cities around the country.