What is LMI and does it apply to me?

Lender’s Mortgage Insurance

If you are looking to purchase a home and have a deposit of less than 20%, you can expect to pay a premium toward something called LMI.

LMI, or Lender’s Mortgage Insurance exists to protect the lender if a client defaults on a home loan that is considered to be ‘high risk’. It’s an insurance policy that covers the lender if the borrower defaults on the loan and the property sale results in a shortfall of funds. Lenders can claim on the LMI policy in such a case.

High risk loans are generally loans with a deposit of less than 20%. In the banking world, this is referred to borrowing ‘over 80% LVR’ (Loan to Value Ratio). It is the insurance policy that essentially enables home buyers to purchase with lower deposits.

Did you know how much you could save

Although similar by name, LMI should not be confused with MPI (Mortgage Protection Insurance, which protects you, the borrower, in case you cannot meet your agreed repayments due to illness, injury, or other factors. MPI has nothing to do with LMI, which protects the lender.

How is LMI calculated?

Typically, LMI is calculated based on two key factors:

  • The Loan to Value Ratio (LVR)
  • The amount of money you wish to borrow

Other factors may come in to play depending on your lender’s policy, so true LMI cost cannot be calculated until a lender and loan product is selected. Speak to your Personal Finance Manager and consider your own circumstances.

As a guide, there are LMI calculators available to help estimate how much you can expect to pay if you want to buy with a low deposit.

Genworth, one of Australia’s few LMI providers, offers a free, no-obligation calculator online for borrowers to use. Check it out here.

How is it paid?

LMI is usually a one-off payment made by the borrower and cannot be transferred. Your lender will arrange it for you.

Some lenders will offer the choice to pay the LMI cost up front, or capitalise it into the total loan amount. Capitalising the cost will allow the borrower to pay off the LMI as part of the loan, however interest is still payable as normal.

For example, a first home buyer has a $50,000 deposit against a property valued at $500,000. As this is a 10% deposit, LMI will apply. The loan amount of $450,000 will incur $8,680 in LMI. The borrower has those two options:

  1. Borrower can choose to pay the $8,680 up front; or
  2. Capitalise the cost into the loan, bringing the total loan to $458,680.

When capitalising the cost, the borrower will be required to pay interest on LMI as they repay the loan. In this case, capitalising the cost would add about $34 on top of the original monthly repayment if the LMI was paid upfront.

How you can avoid LMI:

There are a few circumstances where the borrower can avoid the cost of LMI.

Increase your deposit to be at least 20% of the property value or more

By increasing your deposit to at least 20%, lenders will not consider the loan to be of ‘high risk’ and is probably the safest way to avoid paying LMI.

Alternatively, if you’re looking to get into the market straight away and stop paying rent, keep searching for properties where your deposit will equal 20% of their value – or haggle down a great deal!

Ask a family member to be a guarantor on the loan

Many lenders allow family guarantees on home loans. Your guarantor agrees to offer their own property as an additional security against the loan.

This enables you to borrow more than you initially could, in circumstances where you may not be able to secure the entire loan yourself.

There are risks involved. If you could not meet your repayments, the responsibility lies on your guarantor to meet the agreed repayments. Reduce strongly advises you and your guarantor seek professional financial and legal advice before entering any agreement. If you struggle to meet your scheduled repayments, contact your lender immediately. Temporary assistance can be arranged.

Apply for the Government’s First Home Loan Deposit Scheme *(limited places available)

The FHLDS is a Government scheme introduced in January 2020 to help first home buyers get their foot in the door sooner.

Under the scheme, a first home buyer only requires a deposit of 5% and avoid paying LMI as the Government will guarantee the remainder of the loan up to 20% deposit if it is approved. Eligibility criteria and limited placements apply so it is important to check for availability in your area.

Things to remember

  • LMI is a type of insurance that protects the lender – not you, if you borrow more than 80% of the property’s value
  • The cost of LMI depends on your loan amount and LVR, some other factors may apply
  • It’s a one-off cost that can be paid upfront or capitalised into the loan
  • There are circumstances where LMI can be avoided, including getting a guarantor and applying for the FHLDS where available
  • Seek professional advice before making any decision

 

Any statement/s are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.

*Reduce Home Loans does is not on the Government’s FHLDS panel and does not offer loans against the FHLDS.

 

(29)    For the Rate Cutter Variable where the borrower pays $1170 upfront fees then a corresponding loyalty discount of 0.10% p.a. off the Rate Cutter Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(27)    For the Investor Rate Slasher Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Slasher Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(26)    For the Low Rider Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(25)    For the Economizer Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Economizer Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(24)    For the Super Saver Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.10% p.a. off the Super Saver Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(23)    For the Super Saver Variable where the borrower pays an upfront fee of $1170 then a corresponding loyalty discount of 0.15% p.a. off the Super Saver Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(22)    For the Economizer Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.11% p.a. off the Economizer Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(21)    For the Investor Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(18)    For the Home Owners Dream 1 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(20)    For the Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(14)   For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(12)   For the Investor Rate Lovers Interest Only where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.07% p.a. off the Investor Rate Lovers Interest Only rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(11)   For the Wealth Maximizer 3 year fixed Principal & Interest where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(10)    For the Wealth Maximizer 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(9)    For the Home Owners Dream 3 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(8)    For the Home Owners Dream 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(7)    For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(6)    For the Investor Rate Buster Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Investor Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(5)    For the Rate Buster Variable where the borrower pays an upfront fee of $150 then a corresponding loyalty discount of 0.05% p.a. off the Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(4)For the Rate Slasher Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.08% p.a. off the Rate Slasher Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(3) For the Investor Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Lovers Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(2)For the Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Rate Lovers Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(1) For the Low Rider Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(28) For the Rate Crusher 1 Year Fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.05% p.a. off the Rate Crusher reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(19) For the 1 Year Fixed Wealth Maximizer where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the 1 Year Fixed Wealth Maximizer reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.