What Is Lender's Mortgage Insurance?
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance, also called LMI, can help you achieve your dream of homeownership sooner.
When applying for a home loan, most banks and lenders usually require you to have 20% deposit upfront in order to receive finance for buying a property. If you’re struggling to save the total amount for a deposit though, and fall short of this 20% threshold, LMI could help you secure home loan finance at a higher proportion of the purchasing price, helping you purchase a property sooner.
LMI is an insurance premium on your loan. Instead of relying on a 20% deposit and 80% loan finance ratio, paying LMI can increase the percentage of loan finance you can receive, usually up to 95% of the property value. As the name suggests, the loan to value ratio (LVR) is the amount you need to borrow compared to the property value expressed as a percentage. In general, lenders use this ratio when applying an interest rate and assessing a home loan application.
Most lenders will allow LMI to be capitalised into your home loan or paid upfront. Gateway Bank is the first bank in Australia to also offer a monthly LMI premium payment option. When capitalised into the loan this will mean that your home loan will be larger, and therefore, the amount of extra interest and higher repayment amount will need to be factored into your decision.
LMI is insurance but who does it protect?
LMI is a condition of home loan borrowing where your lender may require you to purchase an insurance premium to protect them, if for any reason, you fail to make your home loan repayments.
It is important to know that LMI protects the lender, not you the borrower in the case of a loan default. You should look at other insurance options if you want to insure yourself against future life events that might contribute to an inability to make loan repayments.
What are the benefits of LMI?
It can be a tough decision whether to buy now with a deposit under 20% and pay LMI, or wait and save for a larger deposit and avoid LMI. However, we know that the housing market can be unpredictable, and if house prices rise, you could end up paying a lot more than the LMI cost.
Remember, everyone’s individual situation is different and determining whether you will be better off buying now or renting will depend on a variety of factors. Check out Helia’s Deposit Options Estimator or talk to your broker or one of the team at Gateway.
How much does it cost?
Unlike most traditional insurance products, LMI is usually a one-off premium payable, instead of an annual or recurring pro-rata rate on your loan. Gateway also has a monthly LMI option available for home buyers.
This premium is charged by the LMI provider to the lender, who will pass this cost on to you. Lenders will often allow you to add the cost to your loan (known as capitalising your LMI into the loan), so good news is you won’t need to have the funds available upfront. With Gateway's flexible monthly LMI option, LMI is paid as a monthly premium instead of being capitalised into your loan, which comes with it's own pros and cons.
The total cost will vary depending on several factors, such as:
- The value of the loan
- The size of the deposit you’ve saved
- Whether the property is to live in or an investment
- The level of risk involved, e.g. whether you’re a casual or full-time employee
Helia’s LMI Fee Estimator can give you a better indication of the total cost payable.
Are there any alternatives to LMI?
If you’re not able to save a large enough deposit and you want to avoid paying LMI, a guarantor could be an option for you.
You could be eligible for a Gateway Family Pledge, which would require a family member to use the available equity in their home to provide additional security to help cover any borrowing shortfall.
The guarantor won’t give you or the lender any money, but they will need to accept the commitments associated with entering into a Family Pledge Loan. Gateway Family Pledge can help you save a significant amount of money, as this guarantee removes some of the risk for the lender, and therefore the need for LMI.
Another option are Government Schemes or Grants. Schemes like the First Home Loan Deposit Scheme or First Home Loan Deposit Scheme (New Homes) are great examples of this. These Schemes provide a Government guarantee for first home buyers to buy or build a new home with a deposit of between 5-20% of the property value without the need for Lenders Mortgage Insurance. Places in Government Schemes are usually limited and run out quickly, or have specific eligibility criteria, so it is important to check if you can apply before factoring these into your home buying process.
How do I apply for LMI?
Your broker or lender will advise you if your loan requires LMI and they will help you prepare all necessary documents. To qualify, your lender will check that you are able to meet regular mortgage repayments and meet relevant policy.
To learn more about how to make your next home loan work for you, give us a call on 1300 302 474 (8am - 6pm AEST, Mon - Fri).