Will I have to pay Lenders' Mortgage Insurance twice if I refinance?

If you’re considering refinancing, chances are you’re crunching the numbers on the cost of switching. When it comes to Lender’s Mortgage Insurance, if your loan-to-value ratio (LVR) is above 80%, you will need to pay it again. 

How banks determine if you need to pay LMI

If your deposit was less than 20% of your property’s value when you took out your original loan, you may have paid Lenders’ Mortgage Insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

LMI is an insurance cost paid by the borrower to the lender that works to protect the lender from your risk of defaulting on the home loan. This is because lenders see having a larger deposit of 20% or more as a sign of strong creditworthiness, and an indication you’re less likely to default. 

If you’ve already paid a deposit and are considering refinancing, a lender will instead look at your loan-to-value ratio (LVR) to determine if you need to pay LMI. 

If your LVR is above 80%, you will likely be charged LMI again when refinancing.

How your LVR is calculated

LVR is a representation of the amount of money you have borrowed in comparison to the value of the property.

For example, if a property is worth $500,000 and a hypothetical borrower has saved a deposit of $50,000 - the equivalent of a 10% deposit. In this instance, their LVR would be 90%, as they are borrowing 90% of the value of the property as a home loan.

Keep in mind that your LVR is influenced by:

• The size of your deposit
• How much you pay off your home loan
• The housing market and the property’s value

LMI and refinancing explained

The same borrower decides they want to refinance. For hypothetical-sake, their property is still worth $500,000, but they had chipped away at the loan balance (principal) with ongoing repayments, and the principal owing is now $400,000. The difference between the loan balance and the value of the property is now $100,000. 

In this instance the LVR would be 80%, as they still owe 80% of the value of the property as a home loan. If this borrower were to refinance with an LVR of 80%, it is unlikely that they would need to pay LMI. 

If you want to refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20% security, you’ll need to pay for LMI a second time.

This could potentially add tens of thousands of dollars in upfront costs to your mortgage, depending on the value of the property. So, it’s important to consider whether the financial benefits of refinancing may be worth these costs.

How to lower your LVR to avoid paying LMI twice

If you’re worried you have not reduced your loan balance enough to reduce your LVR, or if the property market is in a downturn and prices are falling in your area, you may be at risk of paying LMI again when you refinance.

Thankfully, there are some steps you can consider taking to lower your LVR that may be worth following before you refinance: 

1. Pay more than the minimum – Reducing the principal owing on your mortgage is one way to lower your LVR. If your home loan allows for additional repayments without penalty, consider doing so to reduce your principal more so than making your minimum repayments. Even an additional $50 a month can go a long way over time.
2. Lump sum payments – It doesn’t just have to be regular, extra repayments, you may also want to consider putting any windfalls towards your mortgage. This could include a tax return, a bonus at work, cash from selling belongings etc.
3. Increase your property’s value – Another way an LVR can lower is when the property equity increases. While this can be hard to control and is influenced by the market, you may be able to boost your property’s equity through home renovation projects and improvements.

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