What is lenders mortgage insurance (LMI)?

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on March 26, 2021
What is lenders mortgage insurance (LMI)?

Buying property without a chunky deposit could see you whacked with the costly lenders mortgage insurance. But the time it takes to save up the deposit could also cost you.

While some say good things come to those who wait, others say the early bird catches the worm.

In the context of buying property in Australia, those who wait to buy property until they’ve saved up a sizeable deposit can save money by not having to pay for lenders mortgage insurance (LMI). But the early birds who buy property sooner after saving the bare minimum 5% deposit have the opportunity to catch their dream house before prices rise, and potentially build a capital gain as their property value increases in a rising market.

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender

Variable
More details
UNLIMITED REDRAWSSPECIAL OFFER
  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
UNLIMITED REDRAWSSPECIAL OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
Variable
More details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES
  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
Variable
More details
NSW/VIC/SA METRO & INNER REGIONAL AREAS
NSW/VIC/SA METRO & INNER REGIONAL AREAS

Variable Home Loan (Principal and Interest)

  • $5000 Cashback. T&Cs Apply.
Variable
More details
REFINANCE ONLY
  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
REFINANCE ONLY

Variable Rate Home Loan – Refinance Only

  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Variable
More details
NO ONGOING FEESFREE REDRAW FACILITY
  • Rate Match Guarantee. Tic:Toc will match the rate on identical variable P&I home loans. T&C's Apply.
NO ONGOING FEESFREE REDRAW FACILITY

Live-in Variable Loan (Principal and Interest) (LVR < 90%)

  • Rate Match Guarantee. Tic:Toc will match the rate on identical variable P&I home loans. T&C's Apply.

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of June 26, 2022. View disclaimer.

These early birds will probably have to pay for lenders mortgage insurance, but perhaps this cost is worth it? Statistics suggest many borrowers might think so, since around one-quarter of Australian housing loans are estimated to be covered by LMI according to the Reserve Bank. 

Yet many Australians don't really know much about lenders mortgage insurance. Around 57% of millennials have never heard of it, while roughly 70% of households think LMI covers them, according to Digital Finance Analytics, which is incorrect.

So this begs the question…

What is lenders mortgage insurance?

Lenders mortgage insurance (LMI for short) is an insurance policy which covers the mortgage lender against the losses they may incur in the event that the borrower can no longer pay loan repayments (an event known as a ‘default’ on the home loan).  

LMI is not to be confused with mortgage protection insurance, which covers borrowers for their mortgage in case of death, sickness, disability, or unemployment.

How does lenders mortgage insurance work?

If a borrower defaults on their mortgage, LMI means the lender can recover what is owed to them by repossessing the property the home loan is tied to. But if the property’s value has fallen, the lender can suffer a loss. This is the risk LMI covers. With this risk of loss passed on to the lenders mortgage insurer, lenders are more willing to approve loans at a higher loan-to-value ratio (LVR), often up to a maximum of 95% of the property’s value or sale price (whichever is lower).

The introduction of lenders mortgage insurance to Australia in 1965 thus created more opportunities for people to get a home loan and also encouraged lenders to charge lower interest rates. The two largest providers of LMI in Australia are:

  • Genworth Financial
  • QBE

The lender decides which LMI provider to go with – the borrower has no choice in the matter.

While LMI only covers the lender, it is usually the borrower who has to pay for it. For many, paying for an insurance policy that only covers a financial institution seems like the worst form of charity. So how do you avoid it?

How much is lenders mortgage insurance?

The upfront cost of LMI premiums typically varies by the size of the loan and the LVR, as illustrated below. They can also depend on what type of borrower you are. For instance, first-time borrowers often pay a higher LMI premium than existing borrowers, even at the same LVR and loan size.

LMI premiums for first home buyers

Estimated property value

95% LVR LMI cost

90% LVR LMI cost

85% LVR LMI cost

$200,000

$4,727

$3,498

$1,550

$400,000

$11,897

$8,575

$3,777

$600,000

$23,954

$13,284

$6,463

$800,000

$31,939

$17,712

$8,617

Source: Savings.com.au's Lenders Mortgage Insurance Calculator. Prices including GST but excluding stamp duty. Based on a loan term up to 30 years.

Is mortgage insurance worth paying? 

LMI can be worth paying in circumstances where you don’t have the time to save up a 20% deposit. In a property market where prices are rising quicker than you can save, or if there’s a rare, limited-time opportunity for you to snap up your dream house at a good price, getting in faster and paying the extra fee can be a better deal. 

Let's take a look at how this works: 

Lenders mortgage insurance case study

LMI case study

Brianna has $40,000 in savings and wants to buy a $400,000 property. Her $40,000 in savings would be worth a 10% deposit, putting her LVR at 90%. This would see her charged an LMI premium of around $7,700.

Brianna could save herself from having to pay this by waiting till she’d saved up a 20% deposit ($80,000). At her current wage and expenses, she’s saving $20,000 per year, so this would take her two years to save up a total deposit of $80,000. Brianna might decide it is worth the two-year wait to save herself from paying more than $7,000 extra in LMI.

But what if the property’s value is increasing at a rate of 5% per annum? By the time Brianna has saved up the $80,000, the property would be worth $441,000 and Brianna’s $80,000 would be worth only 18%. Had Brianna bought the property two years’ earlier with just her 10% deposit, she could’ve paid off a significant portion of her loan and earned $41,000 in unrealised capital gains.

In that case, the cost of LMI seems worth it.

How to avoid lenders mortgage insurance

Typically, lenders exempt borrowers from having to pay for lenders mortgage insurance if the deposit on the property is over 20% (80% LVR) of the property’s value or sale price. This is because lenders perceive borrowers with deposits over 20% as less likely to default on a loan. A 20% deposit is viewed as a large enough buffer to protect lenders from a fall in the value of the property so they can recover the amount owed to them if the borrower defaults.

Some circumstances may require a larger deposit though. In specific suburbs that a lender perceives as having high default rates and/or at risk of a large fall in prices (like what was seen in some of the regional mining towns when the capital infrastructure boom ended), the lender may require a bigger deposit for the borrower to be exempt from LMI, like 30 or 40%. 

Other ways of avoiding lenders mortgage insurance

Borrowers can be exempt from having to pay LMI for other reasons, such as:

  • Having a guarantor: Many lenders will waive LMI on the loan (no matter how small the deposit) if the borrower is backed by a quality guarantor (such as a parent) that legally accepts responsibility for the mortgage repayments if the borrower cannot make them.
  • Working in a highly-regarded profession: Borrowers working in specific professions (such as doctors, accountants, lawyers etc.) that are considered to be highly paid and relatively stable can sometimes borrow up to 90% LVR without having to pay LVR.
  • Get a government grant: Grants like the First Home Loan Deposit Scheme (FHLDS) let first home buyers secure a property with a deposit as low as 5% and have their LMI paid by the government. 
  • Apply with certain lenders: Although you should compare different loans on rates and fees, some lenders offer discounts or waived LMI fees for some borrowers. Examples include St. George reducing LMI to $1 for first home buyers or ME Bank offering a 25% reduction

Sometimes a combination of other factors can also see LMI waived on the home loan, such having a perfect credit history and requesting a modest loan amount for property in a low-risk suburb.

Is lenders mortgage insurance added to the loan?

LMI premiums can be paid as an upfront one-off payment at settlement or can be added to the loan amount and gradually paid off in the regular mortgage repayments. This means the premium will accrue interest though, costing you more over the long term. Lenders generally prefer it to be paid upfront, but it doesn't hurt to ask. 

Can you get a refund of lenders mortgage insurance premiums?

When you refinance to a different lender or buy a new house, it’s unlikely that you’ll get this premium back. You may even have to pay for LMI again if your LVR is still above 80%.

However, in cases where the loan is terminated early, you may be eligible for a partial refund of LMI premiums. Qualifying for an LMI refund also depends on the lender’s LMI policy provider and meeting certain criteria, so it’s worth checking with your lender to see if you’re eligible.

How do I avoid LMI when refinancing?

The simplest way to avoid paying LMI when refinancing is to have an LVR below 80%. Alternatively, you could try asking a member of your family to go guarantor.

Savings.com.au’s two cents

Avoiding LMI obviously saves you money by not having to pay premiums. But if property values rise in the time it takes you to come up with a 20% deposit, you’d pay more on the purchase price than you would’ve if you’d snapped up a house back when you only had a 5% deposit. You may even be shocked to discover that because prices have risen, what you thought was a 20% deposit is now only worth 15%.

That’s not to mention the intangible emotional costs that can come with having to wait longer – such as missing out on the chance to buy that dream house you’ve always loved that’s rarely on the market.

Of course with LMI, you’re paying thousands for insurance that doesn’t provide any cover to you, which can seem like a big waste of money. Perhaps then its best to aim to have at least a 20% deposit, but be willing to buy with less and bear the cost of LMI in special cases where:

  • You’re very confident the property’s price will rise significantly enough in the near future to outweigh the additional cost of LMI; or
  • You have a strong emotional connection to it and intend on living in it long-term, and you don’t think you’ll get another chance to buy it in the near future.

Photo by Avi Richards on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

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author-avatar
Dominic Beattie is the Editor of Savings.com.au. He has been publishing articles on finance, business and economics since 2015, having previously worked at financial research firm and comparison site Canstar before helping to launch Savings.com.au in November 2018. Dominic's commentary has featured in various news outlets, including: Channel 7 News, News.com.au, Yahoo Finance Australia, Domain, Realestate.com.au, Daily Mail and Radio 2NURFM.

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