What is Lender's Mortgage Insurance?

LMI only applies for low-deposit home loans, which are also known as high Loan to Value Ratio (LVR) loans – mortgages with deposits of less than 20%. For example, paying a deposit of 10% or 5% means having an LVR of 90% or 95% respectively. 

If you can only afford a small deposit on a home loan, your lender may take out an insurance policy that covers its risk of losing money if you were to default on your repayments and the lender is forced to sell the property.

It’s essential to remember that an LMI policy ONLY covers your lender – it does NOT protect your own finances if you default on your mortgage repayments. To be insured against this risk, you may want to search for income protection insurance or mortgage protection insurance. In some cases, these policies may be available as a feature of your superannuation fund, along with life insurance.

Even though LMI only covers your lender, and does not cover you, you will likely still need to pay for it. Many lenders pass the cost of the LMI premium on to the borrower applying for the home loan – that’s you.

It’s also important to remember that LMI is not transferable - if you later choose to refinance your mortgage, you may need to pay LMI a second time if your equity is still under 20%. 

The cost of LMI is usually thousands of dollars, though the exact cost can vary. Just like many other insurance premiums, LMI costs are calculated based on a range of factors, including:

• Your lender
• Their insurer – Helia (formerly 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 a small deposit plus LMI can often end up less than paying a full deposit. That said, LMI is still a significant expense to budget for when buying a house.

LMI is typically paid to the lender as an upfront charge when taking out your mortgage, alongside any other upfront or establishment fees. As an alternative to paying for LMI upfront, you may sometimes be offered the option to add the cost into the mortgage. However, keep in mind that capitalising your home loan costs could mean paying more over the long run, as you’ll be charged interest on this extra amount.

Online tools such as RateCity’s LMI Calculator can provide you with a Lenders Mortgage Insurance estimate. Calculating your LMI estimate 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.

Source: RateCity LMI Calculator

Remember that this is an estimate only that does consider your specific individual circumstances. To get a more exact idea of how much you’re likely to pay in LMI charges, you could consider asking your mortgage broker or contacting the lender directly.

The simplest way to avoid 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 lot of money to put aside. For example, a 20% deposit on a home valued at $500,000 is $100,000. And if you want to buy property in one of Australia’s biggest capital cities, chances are you’ll be spending much more.

When it comes to Lenders Mortgage Insurance for first home buyers, you may be eligible for a government grant or subsidy that could help you get into the property market sooner, and without having to pay LMI fees. 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 needing 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).

Another way to get a no LMI home loan 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. Keep in mind that this could put the guarantor’s own finances at risk, so be sure everyone is aware of what’s involved before signing on any dotted lines.

Some banks and mortgage lenders offer lenders mortgage insurance waivers for specific customers. Getting a lenders mortgage insurance waiver may require you to fulfil strict eligibility criteria. For example, a lender may offer to waive your LMI if you can pay a 15% deposit upfront.

Some lenders may also offer LMI waivers to borrowers working in specific industries, such as medical professionals. As banks want to secure high-value professionals as customers, they may be willing to take on more of the financial risk by covering the cost of LMI. However, not all lenders offer LMI waivers for professionals, and you may need to fulfil specific terms and conditions, such as being a member of a recognised industry association.

Planning, research and shopping around are the key to understanding your total home loan costs, from deposit to LMI. 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. A mortgage broker may also be able to help you work out if you’re eligible for any LMI waivers and help you with your application.