You might have encountered Lenders’ Mortgage Insurance (LMI) as a requirement when taking out a home loan. It may be especially confusing for first-time buyers, and the cost of LMI may catch you off-guard.
But what exactly is LMI, and is there a way to skip it?
What is LMI?
In a nutshell, Lenders’ Mortgage Insurance or LMI is an insurance premium required by your bank if you cannot put out at least 20% of the property’s value. Borrowing more than 80% of the property’s value exposes your bank to greater risk, and LMI is designed to protect the lender from such risk.
Moreover, if you default on your home loan and your security cannot fully cover the remaining balance, the LMI provider will cover the net losses incurred by the loan default.
Many of our clients ask how exactly LMI works and who does it really protect?
What Does LMI Protect?
Banks and lenders require Lenders’ Mortgage Insurance (LMI) to insure themselves if a borrower fails to meet repayments and defaults on the loan. Usually, the defaulting borrower will have to sell the loan security to cover the outstanding loan balance, and if it doesn’t fully cover the balance, LMI will pay for the rest.
In short, LMI protects the bank or lender and not the borrower. But you must pay LMI premiums since your bank will be exposed to a bigger risk. Once approved, LMI protects the lender throughout the loan term and up to 30 years.
How Much Do LMI Premiums Cost?
Banks and non-bank lenders usually absorb LMI premium fees into your approved loan amount. That means while you haven’t paid a separate amount for LMI fees, your bank charges it upfront and deducts it from your overall loan amount.
Furthermore, LMI costs will largely depend on several factors, and no two home loan contracts will have the same LMI fees. Your lenders’ mortgage premiums will be influenced by many factors, including:
Larger loan amounts pose pose greater risk to lenders, thereby attracting a higher LMI fee if you can’t provide the 20% deposit.
The less deposit you can provide, the higher risk it is for your bank, hence the higher your LMI premium will be. However, lenders may offer special rate loans covering up to 95% of your home—that means you only need to provide a 5% deposit and pay LMI premiums.
Speak with our senior mortgage specialists and discover the sweet spot between the deposit amount and LVR to minimise LMI fees and offset the cost over time.
Will I benefit from LMI premiums?
We’ve tackled how LMI premiums protect banks and lenders, but it also offer advantages to home loan borrowers that you should not overlook. One primary benefit of having an LMI is that it allows you to apply for home loans without meeting the 20% deposit.
Think about taking up a home loan to purchase a $1,300,000 property. In most cases, you must meet the 20% deposit, which sums up to $260,000! That deposit alone is substantial for most borrowers, so LMI can help them crack the property market faster and reap the advantages of increasing property value sooner, hopefully offsetting the loan.
Simply put, LMI allows individuals who would otherwise not attain a loan due to the hefty deposit needed.
Do I Need LMI?
Whether or not you need LMI premiums will depend on several factors unique to every borrower and lender. We highly recommend speaking with a senior mortgage specialist so you can discuss your financial circumstances thoroughly.
At Mortgage Pros, we will look into your borrowing power and long-term goals to deliver the best home loan solutions tailored to your specific needs. We can sometimes even negotiate an LMI waiver or discount on your behalf.
Are there ways to skip LMI entirely?
Now that you know the pros and cons of LMI, you might think about ways to avoid paying it without cutting corners on your home loan. The good news is that you don’t need to cheat the system or play dirty tricks with your bank to skip LMI altogether.
Note that skipping LMI may not be the best idea for everyone. You’ve seen how hefty the deposit can be from our earlier example. But if you still want to avoid LMI, here are surefire ways straight from our major banks:
Borrowers may skip LMI fees if they’re applying under a government grant. Depending on your state type of home, you may receive loan discounts and LMI waivers covering the total loan deposit.
Government grants include First Home Owner Grant and First Home Guarantee, among many others. These grants are often covered in your total deposit price, letting you land a home loan with less deposit and reduced LMI costs.
Furthermore, the First Home Guarantee only requires a 5% minimum deposit and allows individual or joint applicants, making it perfect for new families and individuals moving to a new home.
Having a loan guarantor
Most lenders may waive LMI if an exceptional guarantor backs your loan application. A guarantor legally accepts responsibility to cover the loan repayments if you (as a borrower) cannot meet regular repayments for some reason.
Researching different lenders
Each lender is unique and offers varying lending policies and loan packages. If you take time researching different lenders in your area, you may find some who offer LMI discounts, while others may implement temporary waivers to get you started quickly.
Nevertheless, it’s best to consult with a senior mortgage broker to find the best home loan options tailored to your unique needs.
Lenders’ Mortgage Insurance is an insurance premium designed to protect banks in case of a loan default. This ensures your lender doesn’t end up at a loss and that any risk in your home loan is covered.
Moreover, LMI remains vital in Australia’s home loan industry as it protects banks from perceived risks. It also allows borrowers to lock their dream homes sooner before it gets more expensive.
If you’d like to know more about LMI and land your dream home with a smaller deposit, talk to our senior mortgage specialists today! At Mortgage Pros, we’ll discuss how LMI can boost your home loan or cost you in the long run.