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There’s already so much to think about when buying a home, from interest rates and fees to conveyancing and stamp duty. But a key property term you should be aware of is lenders mortgage insurance, otherwise commonly referred to as LMI.

If you haven’t saved up the required deposit (typically 20%), lenders mortgage insurance (LMI) could help you enter the property market sooner – but, at a cost.

Let’s break down what LMI is, how it works, who needs it, and more.

What is lenders mortgage insurance (LMI)?

Lenders mortgage insurance (LMI) is an insurance that lenders may require certain homebuyers to take out when applying for finance to purchase a home. Generally, LMI would be required when you have less than a 20% deposit when factoring in the price of the home plus all the costs associated with purchasing it, like Stamp Duty.

Remember: LMI generally applies when the Loan-to-Value Ratio, or LVR, is greater than 80%, i.e. the amount you need to borrow as a percentage of the value of the property you’re purchasing.  If you have less than 20% equity (which is greater than 80% loan-to-value ratio (LVR), you may have to take out Lender’s Mortgage Insurance (LMI).

LMI is designed to protect the lender from any loss they could incur if you’re unable to make the repayments.  It does not protect you, the borrower, and it cannot be transferred from one lender to another.

The smaller your deposit, when considering the property purchase price (plus costs), the higher your Loan-to-Value Ratio (LVR) will be. If the LMI cost is added to your loan amount, this will further impact your LVR.

You can determine your LVR using our free home loan service, which takes a variety of factors into account to give you specific and helpful information.

couple purchasing home loan with lenders mortgage insurance

How does lenders mortgage insurance work?

Once you’ve applied for a home loan and the lender has calculated the loan-to-value ratio, LVR, they’ll determine whether or not you need to take out lenders mortgage insurance, LMI.  Generally, LMI would only apply to borrowers who have an LVR greater than 80%.

LMI is used to protect the lender from any financial loss that may occur if the borrower does not make their regular loan repayments.

While LMI protects the lender, it’s up to you, as the borrower, to pay for it.  There are several ways you can pay LMI, including:

  • an up-front, one-off flat fee at the time of loan settlement; or
  • capitalising it (adding it to your home loan) which will mean that it is paid for as a part of your regular mortgage repayments, over the term of the loan.

When it comes to the latter, you’ll have to pay interest on the LMI costs in line with your loan’s interest rate over the full term, which ultimately increases the cost and will increase your loan repayments.

Depending on your lender, you may not have both of these options when it comes to paying LMI. Some may only offer one or the other, although there are now a handful of different lenders that have a variety of ways to pay for LMI:

  • ​Some only charge nominal amounts for LMI (such as $1 for eligible applicants)
  • Some let you pay off LMIseparately from your mortgage repayments

How much is lenders mortgage insurance?

There’s no one-size-fits-all answer for how much LMI costs, as several factors determine the final value. Generally, the level of risk, the size of your deposit and how much is being borrowed will affect what you end up paying.

We’ll explain in more detail how the cost of LMI is determined, but first, take a look at the table below to see an example of the kind of sums you could end up paying for LMI:

Deposit size

Property value5%10%15%
$500,000$ 14,871.82$ 8,679.89$ 4,712.67
$700,000$ 27,946.62$ 15,498.00$ 7,540.27
$1,000,000$ 39,923.75$ 22,140.00$ 10,771.82
Assumptions: Calculated via Genworth’s LMI fee estimator. Assumes buyer is a first home buyer with a 30-year owner-occupied home loan. Fees subject to change, guide only. LMI costs can also vary by state.  Assumes an upfront LMI premium. Excludes stamp duty.

What determines the cost of lenders mortgage insurance?

Factors that impact the price of LMI include:

  • Your LVR: The smaller your deposit, the higher your LMI fee will likely be in most cases, as it’s based on the amount of money you are borrowing in relation to the property value. Having a small deposit with more money borrowed equals more risk, and so the LMI policy protects the lender in the event that you are unable to meet your regular repayments on your loan or if you default on your loan repayments.
  • The property value: While this is related to the size of your deposit, with soaring property prices it can be harder to save for a 20% deposit. If the price of the property is high, so too will be the required deposit unless you want to pay LMI.
  • 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, Genworth or QBE.
  • The loan purpose: Some financial institutions might apply different LMI rates to an investment property compared to an owner-occupied property that you want to live in.
  • Your loan term: longer loan terms (i.e. over 30 years) can sometimes attract slightly higher LMI premiums compared to shorter loan term
  • Whether you’re a first home buyer: First home buyers (FHBs) can be charged more for LMI, although as we’ll explain below, they can also qualify to have their LMI waived through various government programs.
  • Your employment status: In some cases, borrowers in full-time salaried employment can pay less for LMIcompared to casual and contract/self-employed workers.

How to reduce lenders mortgage insurance fees

If you’re still hesitant about LMI, there are other options for homebuyers to possibly avoid LMI or reduce the risk factor as determined by the lender. These include:

  • Saving for a bigger deposit: You can usually avoid paying LMI with a deposit of 20% or more of the property value and associated costs (although this can vary between lenders). Even if you can’t save a full 20%, a bigger deposit will usually result in you paying less LMI, and you’ll also then save on the interest on the LMI for the life of your loan, if you’ve chosen to capitalise it.
  • Using a family member as a guarantor: A guarantor is someone who’ll guarantee the payment and take on the responsibility of your loan if you find that you can’t make the repayments. This can reduce the risk for the lender but could increase the risk for your loved ones.
  • Applying through the First Home Loan Deposit Scheme (FHLDS): This Australian Government initiative helps a limited number of eligible first-time homebuyers build or purchase a new house with a deposit as low as 5%.
  • Work in a high-income profession: Some high-paying roles, such as lawyers, dentists, engineers or doctors may be seen as less of a risk and may have premiums reduced or removed as a result. However, this is at the discretion of individual lenders.
  • Using equity that you may have in another property: You may be able to use equity from another property as a cash deposit to purchase a new home or refinance.
  • Apply with certain lenders: Some lenders have special LMI offers available to select borrowers. For example, a few offer $1 LMI for those with a deposit as low as 15%.

Frequently asked questions

Can lenders mortgage insurance be refunded?

In most cases, LMI is non-refundable; however, you may be entitled to a partial refund in certain circumstances. For example, LMI premiums can 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. However, not all lenders provide partial refunds.

Always chat to a lender and read their product disclosure statement (PDS) before taking out a loan so you’re aware of their terms and conditions regarding LMI.

Does lenders mortgage insurance apply when refinancing home loans?

You’ll need at least 5% equity in your home (i.e. the value of your home minus what you owe) in order to refinance, in most cases. If you have less than 20% equity or a loan-to-value ratio (LVR) greater than 80%, you may have to take out Lender’s Mortgage Insurance (LMI).

LMI can’t be transferred from one lender to another and you may have to pay this cost again to your new lender, which can be expensive. To avoid this, it’s sometimes better to wait until you have an LVR of 80% or less, or look to negotiate a better rate with your existing lender.

So, yes, it can apply when refinancing your home loan – depending on your circumstances.

Is lenders mortgage insurance the same as mortgage protection insurance?

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, while MPI can protect you (the borrower) against unexpected events such as involuntary redundancy, disability or death if you meet certain criteria outlined by the insurer. In the case of these events, and you’re properly covered, insurers make a lump sum or ongoing payments to the homeowner to cover loan repayments.

Who provides lenders mortgage insurance?

LMI in Australia is arranged by the lender – they will generally use a provider such as QBE or Genworth or they may even self-insure.

How can LMI help me?

Taking out LMI reduces the lender’s risk, but it can also benefit you as a borrower. For example, it may enable you to enter the market earlier with a smaller deposit. You may also be able to purchase a house of choice in some cases with only a 5% deposit.

This opens up your options for entering the housing market sooner, buying into a better location, a larger house, capacity for renovations or a more expensive property. Of course, this can also come with risks: you’re borrowing more, so your mortgage repayments will be higher as a result.

LMI vs stamp duty: what's the difference?

Stamp duty is another upfront home buying cost like LMI, but they are not the same thing. Stamp duty is a tax imposed by state and territory governments on the sale of a property to transfer the ownership of the land from one person to another.

Stamp duty on a property can also be thousands, if not tens of thousands of dollars, but unlike LMI it is not determined by your deposit size, but rather:

  • The state or territory the property is in
  • The price of the property
  • The type of home (house, unit, townhouse etc.)
  • Whether you’re an investor or an owner-occupier (and a first home buyer too)
  • Whether the house is newly built, or if you’re buying vacant land

And more.

Learn more about stamp duty here.

Can LMI be paid monthly?

LMI can be paid monthly, fortnightly or weekly, depending on the lender: these payments will depend on how often you make your home loan repayments. Lenders will allow you to capitalise your LMI costs into your home loan repayments, meaning they will add to your repayment size and accrue interest depending on your interest rate.

​Since your repayments will be bigger, this can make your total loan cost larger as a result, so it’s worth deliberating on whether it’s better for you to pay your LMI off on an ongoing basis or just pay it all off upfront.

What other home-buying upfront costs are there?

LMI (if required), along with stamp duty, are by far the largest upfront expenses associated with buying a home. But there are a few others ones that can add up if you aren’t careful, like:

  • Application fees and valuation fees
  • Mortgage registration fees
  • Conveyancing and legal fees

Do I actually need lenders mortgage insurance?

Only you will know whether it’s best to pay a smaller deposit or save up for a larger deposit and reduce, or even avoid, LMI. Before deciding, weigh up:

  • How much you could borrow with a smaller deposit and a larger one;
  • What repayments would be with LMI or without, if you choose to capitalise this expense; and
  • What property you could afford with your current deposit vs the property you could afford with a bigger one.

Here’s an example of when you may need LMI: Bruce has found his dream house in Queensland and it’s valued at $500,000. He’s saved a deposit of $50,000, or 10% of the total value of the home.

Bruce would require a loan for $450,000, or 90% of the property’s total value (i.e. resulting in a 90% LVR). Because his deposit is less than 20% of the property’s value, and the total amount of the loan exceeds 80% of the cost of the property, his lender requires him to pay LMI to cover their risk if Bruce is unable to make his home loan repayments or pay back his loan fully.

Assuming he’s a non-first home buyer and is buying the home to live in, he would have to pay approximately:

  • $14,177 in LMI
  • $8,750 in stamp duty
  • $1,578 in government fees (like mortgage registration fees)

That’s approximately $24,505 worth of fees and government charges.

In this instance, the actual cost of purchasing the home has now increased from $500,000 to $524,505, so when considering Bruce’s $50,000 deposit, he will either need to consider saving a bigger deposit to help cover the fees, alternatively capitalise these fees into his loan, and increase his borrowings from $450,000 to $474,505.

By borrowing the additional amount, this will change his LVR from 90% to nearly 95%. LMI might only protect the lender, but it will allow Bruce to purchase his home sooner.

Calculations made via Westpac’s LMI & stamp duty calculator.

With property prices as high as they are, it can be difficult to save enough of a deposit. According to the Australian Prudential Regulation Authority (APRA), there was a 33.5% yearly increase in the number of LMI policies taken out as at September 2021, in line with a more than 20% annual increase in house prices.1,2

As property prices increase, it would seem that more and more people are willing to pay for LMI in order to achieve their dreams of homeownership.

man with lenders mortgage insurance standing in front of new home

Cost of Lenders Mortgage Insurance (LMI) on a house with median value – November 2021

Capital CityMedian valueWith a 5% depositWith a 10% depositWith a 15% deposit
Melbourne$780,303$34,606.36$19,173.64$9,332.35
Sydney$1,071,709$52,273.71$26,334.08$12,817.52
Brisbane$642,097$28,476.93$15,777.64$7,679.40
Adelaide$543,265$24,093.74$10,478.84$5,679.83
Perth$526,625$23,355.76$10,157.88$5,505.86
Hobart$678,170$30,076.76$16,664.02$8,110.83
Canberra$864,909$38,358.62$21,252.59$10,344.22
National average$686,339$30,439.05$16,864.75$8,208.54
Figures based on Genworth’s LMI calculator. Assumes a 30-year loan term, owner-occupier mortgage for a non-first home buyer. Dwelling price data via CoreLogic.

The final word

If your dream home is out of your reach as you don’t have an adequate deposit saved up, then understanding lenders mortgage insurance is necessary and shouldn’t be scary. LMI should be discussed and taken into consideration with your lender, based on your personal and financial circumstances.

If you’re in the market for your first home or a new one, we’re here to help! You can compare home loans from a range of providers with us. Our service allows you to compare interest rates, fees and more. It pays to compare, so start your search today.

Sources

1 Australian Prudential Regulation Authority (APRA), Quarterly general insurance statistics, 25 November 2021.
2 CoreLogic Home Value Index, 1 November 2021.

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