Understanding Lenders Mortgage Insurance (LMI) in Australia
When it comes to purchasing a property in Australia, many aspiring homeowners find themselves facing the challenge of saving a substantial deposit. To mitigate the risk associated with low deposit loans, lenders often require borrowers to pay for Lender’s Mortgage Insurance (LMI). In this blog post, we’ll delve into the details of LMI, exploring what it is, when it is required, and how it affects borrowers.
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance is an insurance policy that protects the lender in case the borrower defaults on their mortgage repayments. It’s important to note that LMI does not protect the borrower; rather, it provides a safeguard for the lender by transferring the risk of low-deposit loans to an insurance provider. This means that while the insurer will cover the lender for any loss, the borrower will still be held liable to repay the loss plus any additional costs, fees, and charges.
When is LMI required?
LMI is generally required when the borrower has a deposit of less than 20% of the property’s purchase price. In Australia, this threshold is known as the “80% Loan-to-Value Ratio” (LVR). If the LVR exceeds 80%, the lender may insist on LMI to protect their interests. Occasionally some lenders run special offers where they will lend up to a higher LVRs (usually 85%) without requiring LMI, and a select few lenders offer loans to certain professionals (qualified medical and accounting professionals) up to 90% LVR without LMI. Other circumstances where LMI can be avoided are when additional property is included as security for the loan. This could be property already owned by the borrower, or with a family member going as guarantor on the loan and offering their property as additional security. For first home buyers, there may be Government schemes, such as the First Home Guarantee, which mean LMI is not required.
How does LMI affect borrowers?
Cost: The cost of LMI varies depending on the loan amount, LVR, and other factors. It is typically a one-time payment, either added to the loan amount or paid upfront. The cost can range from a few thousand dollars to tens of thousands of dollars, depending on the loan size and LVR.
Accessibility to loans: LMI enables borrowers with a smaller deposit to access home loans that would otherwise be out of reach. By providing a layer of security to the lender, it reduces their risk and increases the borrower’s chances of loan approval.
Loan-to-Value Ratio (LVR): LMI allows borrowers to obtain a loan with a higher LVR, which means they can secure a property with a smaller deposit. However, it’s important to note that a higher LVR generally results in higher interest rates, as it is considered a riskier loan for the lender.
Equity and refinancing: As the borrower pays down the mortgage and the property value increases, the LVR decreases. Once the LVR drops below 80%, borrowers will no longer require LMI if they were to refinance their loan. Whilst uncommon, in some cases part of the LMI premium can be refunded to the borrower however this will depend on the lender, the mortgage insurer, the LMI policy wording, and the borrowers circumstances. This can be advantageous as it reduces the overall cost of the loan.
Lenders Mortgage Insurance (LMI) is a vital component of the Australian property market, enabling borrowers with smaller deposits to access home loans. While it adds an additional cost to the loan, it provides an opportunity for homeownership that would otherwise be out of reach for many Australians. If you’re considering a low deposit loan (where a deposit of 5% to 10% plus purchase costs are available), it’s essential to carefully evaluate the costs and benefits of LMI, as well as consult with a mortgage broker or financial advisor who can provide personalised advice based on your unique circumstances. Remember, understanding LMI and its implications is crucial for making informed decisions on your home buying journey.