Australian regulations determine that a lender can only fund up to 80% of the purchase price of a residential property, so the buyer is required to provide a 20% deposit. It would take tens of years for most people to save such a huge sum, so Lenders’ Mortgage Insurance (LMI) is a product that was designed to bridge the gap.
LMI is an insurance policy designed to protect the lender if the borrower defaults on their loan. If sale of the property does not cover the unpaid value of the mortgage, the bank can claim any losses against the LMI policy. By reducing the risk to the lender, LMI allows banks and other financial institutions to lend larger amounts of money and approve more home loan applications.
It is important to understand that LMI offers no protection to you as the borrower, it only covers the lender in case of default. There is additional insurance available to home buyers known as Mortgage Protection Insurance which can cover the borrower’s costs in case of unfortunate events, and you should speak with your broker if you think this type of protection would be beneficial to you.
When is LMI payable?
In most cases, a lender will require you to purchase LMI if the deposit for the property is less than 20% with no guarantors involved – in other words, when the loan to value ratio (LVR) is more than 80%.
If your lender requires you to purchase LMI, it will usually be paid at the drawdown of the loan. You will have the option to pay cash up front, or in many cases the cost can be capitalised into the total loan amount. It is a one-off cost so there is no need to make annual insurance payments, however the premiums are typically non-refundable in case you decide to refinance to another institution.
How much does it cost?
LMI premiums vary between lenders, and the price is usually based on a percentage rate of your total mortgage amount. There is generally a sliding price scale, so the cost of LMI increases as the LVR and/or loan value increases. Speak with your broker for an accurate calculation of LMI costs for your personal situation.
Depending on the state that you live in, stamp duty may also be payable on top of the LMI premium.
Can LMI be waived?
An LMI waiver is very difficult to secure, however there are some specific circumstances which may warrant a waiver. Certain lenders are able to waive LMI for professionals within a predetermined list of industries, such as doctors, lawyers and other professional fields. Speak with your broker to see whether you may qualify for an LMI waiver and potentially save tens of thousands of dollars!
