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.
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.
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:
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:
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:
|$500,000||$ 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.|
Factors that impact the price of LMI include:
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:
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.
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.
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.
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.
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.
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:
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.
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:
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:
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:
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.
|Capital City||Median value||With a 5% deposit||With a 10% deposit||With a 15% deposit|
|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.|
1 Australian Prudential Regulation Authority (APRA), Quarterly general insurance statistics, 25 November 2021.
2 CoreLogic Home Value Index, 1 November 2021.