Lenders Mortgage Insurance (LMI) Explained: How Much Does It Cost?
Purchasing a $600,000 house with a 5% deposit ($30,000) could result in paying lenders mortgage insurance premium of over $22,000, according to our LMI estimator. However, you can minimise or even avoid LMI costs by saving a larger deposit, using a parental guarantor loan, or taking advantage of the First Home Loan Deposit Scheme if you're eligible.
Important Reminder: lenders mortgage insurance is designed to protect your lender, not you. Mortgage protection insurance is what covers you in case of missed repayments due to illness or job loss.
Estimating Your LMI Costs
The lender's mortgage insurance amount you pay depends on your loan and deposit sizes. When applying for a low deposit home loan, it's essential to estimate potential LMI costs and include them in your total home-buying expenses. To give you a rough idea of LMI costs, you can use the Settled Home Loans LMI calculator, however, below are some approximate examples to give you an idea of the potential costs.
Property City: Sydney, NSW
Property Value: $800,000
Deposit Amount: $120,000
Deposit Percentage: 15%
Approx. LMI Premium: $14,584
Property City: Melbourne, VIC
Property Value: $600,000
Deposit Amount: $60,000
Deposit Percentage: 10%
Approx. LMI Premium: $26,000
Property City: Brisbane, QLD
Property Value: $700,000
Deposit Amount: $35,000
Deposit Percentage: 5%
Approx. LMI Premium: $30,789
How a Larger Deposit Can Reduce Your LMI Costs
The more significant your deposit, the less LMI you'll pay. For instance, a borrower with a 15% deposit will pay less LMI than someone with a 5% deposit on the same property.
Paying Your LMI Premium: Upfront or Capitalised
You can pay your LMI premiums in a lump sum during settlement or capitalise the premium by adding it to your loan. If you choose to capitalise the premium, you'll borrow the LMI costs along with your loan amount, paying it off over time. This will increase your monthly home loan repayments.
Avoiding or Minimising LMI Costs
While lenders mortgage insurance can be a significant expense, it enables many first-time homebuyers to enter the market without needing a 20% deposit. Here are some strategies to minimise or avoid LMI costs:
First Home Loan Deposit Scheme
If you're unable to pay lenders mortgage insurance or prefer not to, you can actually have the government cover it for you. That's right: if you're eligible for the First Home Loan Deposit Scheme, this could be an option. As long as you and your partner (if applicable) are both Australian citizens, you can purchase your first property with only a 5% deposit and no LMI, thanks to the Federal Government.
However, keep in mind that these government schemes aren't permanent and have an annual limit of 10,000 spots. So, ensure you qualify and secure your place before starting the loan application process.
Employment-based LMI waivers
Based on your profession, you might be eligible for a lenders mortgage insurance waiver on your home loan. Professionals such as medical professionals, dentists, accountants, lawyers, engineers, or athletes may receive special discounts and loan terms due to their higher income. In some instances, borrowers in these fields can even avoid LMI with a 10% deposit, or grant a LMI waiver all together.
The high income associated with these professions often indicates a solid employment history, making the borrower appear as a low risk to the lender.
Keep in mind, though, that the eligible professions and discounts can vary from one lender to another.
Maintain a LVR below 80%:
The simplest method to avoid paying LMI is to keep a loan-to-value ratio under 80%. Although gathering a substantial deposit can be tough, using property equity or securing a 20% deposit is ideal. In the long term, it might be wiser to save longer, bypass LMI, and invest more in the property, rather than spending money on home loan insurance.
Family guarantees
The Bank of Mum and Dad could help you enter the property market by utilising a guarantor loan or borrowing from a family member. Receiving your inheritance early and investing in appreciating property might be more financially sound than waiting, as the relative value could decrease compared to rising property value.
LMI Insurers in Australia
QBE and Genworth are Australia's two largest LMI insurers, while some lenders provide their own LMI. It's challenging to compare LMI providers since lenders typically have exclusive agreements with one insurer.
LMI Premium Refunds: Are They Possible?
Obtaining a refund on your LMI costs is unlikely. However, if you repay your home loan within two years of settlement, you might be eligible for a partial refund, depending on your lender. To inquire about a refund, contact your lender and follow the necessary steps.
Popular LMI Providers
Lenders often have their own lender mortgage insurance products with varying names. The two major LMI insurers in Australia are Genworth and QBE.
Genworth
A subsidiary of US-based Genworth Financial, Genworth offers LMI services to over 100 Australian lenders.
QBE
This global company provides various insurance products, including personal insurance for cars, homes, and travels, as well as workers' compensation and other related services.
LMI can be a significant expense for homebuyers, but it's not an insurmountable hurdle. By exploring options such as the First Home Loan Deposit Scheme, leveraging a larger deposit, or utilising family guarantees, you can minimise or even avoid LMI costs altogether. Additionally, some professionals may be eligible for LMI waivers based on their income and job stability. It's crucial to understand your options and consider which strategy best fits your situation.
Ready to discuss your LMI questions and find the best path forward? Our Credit Advisers are here to help. Give us a call at 1300 709 722 or schedule a complimentary Discovery Call to start your journey towards homeownership with confidence.
