What is Lender's Mortgage Insurance?

If you can only afford a small deposit on a home loan (typically less than 20% of the property value), your lender may take out insurance that covers their risk in case you default on your repayments.

While LMI only covers your lender, and not you, many lenders will pass on the cost of the LMI premium to the borrower applying for the home loan – that’s you.

Low-deposit home loans are also known as high Loan to Value Ratio (LVR) loans – mortgages with deposits of 10% or 5% have LVRs of 90% and 95% respectively.

The cost of LMI is usually thousands of dollars, though the exact cost can vary as it’s determined by individual circumstances.

Just like many other insurance premiums, LMI costs are calculated based on a range of factors, including:

• Your lender
• Their insurer – Genworth and QBE are two major LMI providers, though there are others
• The size of your deposit
• The value of the property you’re buying
• The term of your mortgage
• If you’ll live in the property – some insurers consider owner occupiers to be less risky than investors
• Your employment status
• Whether you have savings
• If you’re a first home buyer

…and many more.

Depending on the value of the property you’re buying, the total cost of deposit plus LMI can often end up less than paying a full deposit, but LMI is still a significant expense that you’ll need to consider when budgeting to buy a house.

Online tools such as RateCity’s LMI Calculator can provide you with an estimate of your LMI charges. Calculating your estimated LMI can help you more accurately budget for your property purchase and avoid being blindsided by unexpected costs.

Simply enter the value of the property you want to buy, and the amount you plan to borrow to purchase the property. For example, if you’re planning to buy a $500,000 property with a 15% deposit of $75,000, your loan amount will be $425,000. The calculator will then automatically show the estimated LMI on this loan.

Of course, remember that this is an estimation only that does not take into account any of your individual circumstances. If this is something you want to pursue, it may help to speak to a lender or mortgage broker directly.

The simplest way to avoid paying LMI would be to save a deposit of at least 20% before you start shopping for a new home. However, a 20% deposit is often a substantial amount of money to put aside. For example, a 20% deposit on a home valued at $500,000 is is $100,000. If you’re planning to buy property in one of Australia’s biggest capital cities, chances are you’ll be spending much more.

If you are a first home buyer, you may be eligible for a government grant or subsidy that could help you get into the property market sooner.

For example, the Australian Government’s Home Guarantee Scheme (HGS) allows eligible first home buyers to purchase a property with a deposit of as little as 5%, without the need to pay LMI. Instead, the eligible first home buyer’s home loan (from a participating lender) is guaranteed by the National Housing Finance and Investment Corporation (NHFIC).

There are also a number of other government schemes available to eligible homebuyers that may be worth considering.

Another way to avoid paying LMI would be to use a guarantor who would take responsibility for the home loan repayments should you default. A guarantor could be a parent or other family member, who uses the equity in their own property to guarantee your loan.

Planning, research and shopping around are the key to understanding your total home loan costs.

RateCity has a variety of tools in place to help you get started, such as our home loan comparison tables and selection of home loan calculators.