Lender Mortgage Insurance Calculator

How much you might fork out for lenders mortgage insurance (LMI), or whether you have to pay it at all, will depend on how large a deposit you’re able to put down on your new home. If yours is less than 20% of your dream property’s value, you might want to read up on LMI.

What is lenders mortgage insurance (LMI)?

You may have heard that, to buy a piece of property, you need to have saved a 20% deposit. That might sound like a hard ask for many hopeful homeowners. Fortunately, there is one product which can provide an avenue to home ownership for those with smaller deposits: lenders mortgage insurance.

LMI offers protection for lenders, insuring them against losses born from a borrower defaulting on their home loan. Thus, while borrowers typically pay LMI, it doesn’t protect them against mortgage default - only the lender.

If you’re borrowing less than 80% of the value of your property, you probably won’t be asked to pay for LMI. That’s because a person with a hefty deposit is typically thought to represent less of a risk to a lender.

On the other hand, if your deposit is less than 20% of the value of your property, you might need to pay for LMI.

How much is LMI?

The amount you might be asked to pay for LMI will depend on a number of factors, the biggest one being your loan-to-value ratio (LVR). That is, how much you're borrowing via a home loan compared to the value of the property you’re using it to purchase.

For instance, if your dream home comes with a price tag of $500,000 and you’ve saved up a $50,000 deposit, you’ll need to borrow $450,000 to purchase it. In such an instance, your LVR will be 90% (450,000/500,000=0.9) and you’ll probably be asked to pay LMI.

Fortunately, lenders often allow a homeowner to fold LMI into their home loan. While that means a buyer won’t need to fork out the cash upfront, they will have to pay interest on it.

How do you calculate LMI?

LMI can cost a buyer thousands, or even tens of thousands in some cases. If you’re wondering how much LMI could cost you, feel free to plug the details of your property purchase into the above calculator.

Continuing from the above example, if someone were to snap up a $500,000 property with a $50,000 deposit (an LVR of 90%), their LMI will likely come out at around $8,190. That figure could be lower if they bought a more affordable property or saved a larger deposit.

It’s also worth mentioning that LMI is often calculated using a property’s value, rather than its price. Your lender will likely determine a property’s value, so if you’ve paid overs for a house, you might find yourself unexpectedly paying LMI.

Source: Savings.com.au's LMI Calculator.

If the figures on the above chart have you cringing, you’re likely not alone. Buying a house is already an expensive exercise without having to pay for insurance that you won’t benefit from. Fortunately, there are ways to avoid paying LMI.

How to avoid paying LMI

Of course, saving a heftier deposit or purchasing a cheaper property is perhaps the simplest way to avoid paying LMI. Though, a buyer might miss out on their dream home or end up priced out of their ideal market as they wait to build up a 20% deposit. Other ways to dodge the cost include:

Making use of the Home Guarantee Scheme

Buyers in the market for their first home or who haven’t been in the market for a decade might be eligible for the Home Guarantee Scheme and, therefore, could avoid paying LMI. The Home Guarantee Scheme is actually an umbrella encompassing three specific schemes:

• The First Home Guarantee scheme
• The Regional First Home Buyer Guarantee, and
• The Family Home Guarantee

The scheme sees the Australian Government acting as a guarantor for a portion of eligible homebuyers' mortgages, thereby saving them from paying LMI. To be eligible, a buyer’s income needs to be within certain parameters, they must purchase a home within set price caps, and plan to live in the property once they purchase it.

Having a guarantor

If someone in your life is willing to go guarantor on your home loan, you could dodge LMI costs.

A guarantor is another party who signs up to take responsibility for your loan if you fail to meet your repayments. Thus, having a guarantor can make a buyer appear as less of a risk for a lender, bypassing the need for LMI.

Taking advantage of your profession

People working in certain fields might be eligible for an LMI waiver. It's normally on the table for those in typically high-income fields like medicine, law, and finance.

Beyond that, a lender might only waive LMI for people working in specific roles within a field. For instance, while a doctor or dentist might be able to have their LMI waived, a nurse or pharmacist might not.

How does LMI differ from mortgage protection insurance?

It’s important to know that LMI is an entirely different product from mortgage protection insurance. While LMI protects a lender, mortgage protection insurance is designed to protect a borrower.

Mortgage protection insurance typically offers peace of mind that, if a homeowner were to pass away, their mortgage would be paid off by the insurer. It can also provide financial assistance if a mortgage-holder were to find themselves off work due to injury or illness, or if they were to lose their job under certain circumstances.

Do you need to pay stamp duty on LMI?

Depending on which state you’re buying in, you might need to pay stamp duty on your LMI product.

In Victoria, you might face a 10% stamp duty on your LMI, while in Queensland that figure is 9%. Stamp duty will likely be built into the cost of the LMI.

Until it was abolished in 2017, buyers calculating their LMI also needed to consider stamp duty payable on the insurance if they were purchasing property in NSW.