Lenders mortgage insurance (LMI) explained

Are you motivated to get into the property market but haven’t had the time to save a suitable deposit? Are you self-employed and struggle to prove to lenders you have a stable income?

If you answered yes to either of these questions, don’t be disheartened, you still have an opportunity to purchase that dream property.

Lenders mortgage insurance (LMI) can help you buy a property sooner but it’s imperative to understand what it is, its benefits, pitfalls and how it’s calculated before you take the plunge.

What is lenders mortgage insurance?

Lenders mortgage insurance (LMI) protects your lender in the event you can’t make your mortgage repayments – it’s an insurance policy that protects the lender from financial loss.

With the ability to pass on shortfall risk to the insurance company, lenders are more willing to accept a lower deposit. So, by reducing the deposit required, borrowers can purchase a home much earlier.

Lenders Mortgage Insurance2

The upside to this, of course, is you can buy a home without having saved the required 20 per cent deposit.

Realistically, in today’s market, paying LMI now could be cheaper than the extra dollars needed to secure a property in a year’s time if prices rise dramatically in that period of time.

If your loan is high risk – for example, if you’re taking out a large loan, more than 80 per cent of the property value or if you don’t have proof of income and employment history –  then you may be required to pay an LMI premium. This will cover any of the loss to the lender if the property is ever sold at a loss.

LMI means even with a small deposit, you have the potential to own your home sooner, allowing the lender to have confidence in offering you a home loan, because it knows any losses will be covered.

With LMI in place, some lenders will allow you to borrow up to 95 per cent of the purchase price of your home.

How is LMI actually calculated?

Lenders mortgage insurance (LMI) is calculated as a percentage of the loan amount. Your LMI will vary depending on your Loan to Value Ratio (LVR) as well as the amount of money you wish to borrow.

Percentage Of The Loan Amount

The percentage you are required to pay increases as the LVR and loan amount increase and usually goes up in stages.

Lenders mortgage insurance costs differ depending on the loan, lender and the LMI provider. Some institutions will self-insure for deals up to a certain LVR.

Our advice is to shop around as LMI premiums can potentially differ by thousands of dollars between providers.

When do you have to pay LMI?

You can pay LMI as a one-off lump sum at the establishment of the loan or it can be capitalised onto the loan repayments, which is often the case for many buyers. LMI is generally paid at settlement with all other lender and government charges.

Let’s take a look at when LMI is a consideration for a variety of property purchases.

Standard Property Purchase

Usually you will pay LMI on your home loan if you are borrowing more than 80 per cent of the property value on a standard loan or more than 60 per cent of the property value on a low doc loan.

Property Purchase

The danger with a 90 per cent home loan for a lender is that your monthly repayments and loan terms are higher than they would be if you had a 20 per cent deposit or more. For this reason, LMI is usually charged.

Low documentation loans are designed for the self-employed who don’t have the necessary documents required to get traditional home loans and usually carry higher interest rates and require LMI, which adds to the overall cost.

Loan to Value Ratio (LVR)

Loan to Value Ratio (LVR) is the proportion of money you borrow compared to the value of the property. The leftover money is your deposit.

Cost of property      Cost of lenders mortgage insurance

                                    5% deposit     10% deposit   15% deposit

$300,000                     $7,610             $4,077             $2,219

$400,000                     $12,768           $6,912             $3,842

$500,000                     $15,960           $8,640             $4,802

$600,000                     $25,707           $13,176           $6,630

$700,000                     $29,992           $15,372           $7,735

Quotes taken from Genworth LMI calculator, correct as at 3/5/2019.
Based on first homeowner purchase and loan term of up to 30 years.

Reverse mortgage

Reverse Mortgage

A reverse mortgage allows homeowners to access a lump sum or an annuity using their home as collateral. It’s getting a loan against a property you already own, usually accessed by older home owners who have already paid off their home loans.

You wouldn’t usually be charged LMI on a reverse mortgage.

The benefit of reverse mortgages is that borrowers often continue to live in the property until they die or they can use the funds for aged care/accommodation/health services, etc.

Off-the-plan purchases

LMI is often required when buying property off the plan.

There are many pitfalls of purchasing a property before it has been built as there are no guarantees the property you purchase will rise in value, in fact, quite often these valuations will come in lower than the purchase price thus exposing a client’s ability to fulfil the purchase.

Some of the reasons why this might happen are:

  • You have to pay for the developer’s margin to build
  • If the property was sold by a 3rd party, rather than the developer, the agent is often paid fees (sometimes exorbitant) to complete a sale
  • if someone can’t complete a purchase there may be a “forced” sale that will affect the developments overall prices
  • there may also be a number of “like” developments about to complete thereby affecting the property’s overall value due to concentration risk.
  • A flurry of apartment construction during a “boom” will result in an oversupply – and second-hand units (i.e. for sale by their first owner) will be discounted heavily to compete with new units.

This is occurring across the country’s major capitals cities right now.

In fact, we at Intuitive Finance believe that investors who purchased such properties are prone to short-term losses with the changes in the lending environment affecting some buyer’s ability to settle on purchases. This affects everyone’s values as often forced re-sales at lower than the purchase price can eventuate in order to clear the liability. In turn, these reduced prices are often then used as the basis for ongoing valuations.

Unregistered land

Unregistered residential land is land that’s for sale where a certificate of title isn’t yet available. New home builders are unable to start construction on these sites until the land is registered and council has provided a building approval for the individual lot.

If the mortgager/developer can’t proceed, substantial additional costs are usually incurred with another builder completing the works, plus inevitable additional holding costs, including interest on mortgages.

Land For Property

The key for the lender is to ensure that moneys advanced are properly secured.

When the economy is weak, vacant land tends to fluctuate in value and may take longer to sell. This is particularly true in regional areas and remote locations.

Established homes in higher density locations, on the other hand, tend to have more potential buyers and sell much faster.

Banks are more conservative when approving a home loan for vacant land as a result of the higher volatility of land prices.

On a lease

The problem with leased property is you generally can’t borrow against it therefore most insurers won’t take the risk. Examples of leasehold land are still in Canberra and also in Alpine areas where the land remains government owned and you just enter into a long term lease. Most of the time, you will be required to pay LMI on a lease if borrowing more than 60 or 70 per cent. If you have to foreclose on a lease, the lenders can’t rely on your selling of the property to make up any shortfall because you don’t own the property. It would be unusual to secure a loan on a leased property without LMI.

Refinancing

There are various reasons for refinancing:

  • To access a lower rate
  • Debt consolidation
  • An opportunity to invest elsewhere arises
  • More borrowing required due to the need for property improvement or new household costs (e.g. education for the kids) arise.

If your circumstances have changed or if you’ve had your home loan for a few years, refinancing can offer you the chance to take advantage of more flexible features.

When refinancing your loan, not only is there no refund on the LMI premium, regardless of how soon you refinance, you will have to pay it again if your loan is more than 80 per cent of the value of your home.

Refinance

Even though the lender you originally placed your loan with is no longer at risk should you default, the lender that you refinance with isn’t covered. The real problem for homeowners wanting to switch lenders, say from NAB to Westpac, is the potential double payment of LMI. It generally isn’t possible to transfer your mortgage insurance if you switch lenders.

The ‘double dipping’ of LMI in these circumstances continues to be a hot topic among the industry, but unless there are regulatory rules put in place to change the practice, then expect the status quo to remain.

Top up Mortgage Insurance

If you have originally paid mortgage insurance on your property, and your property’s value increases in the future, you wish to use the equity you have gained for another purchase or purpose. Under these circumstances you may choose to increase your loan back to within the original LVR (Loan to value ratio) and simply pay a small top-up premium.

This is a very effective way to access equity within an original premium.

Frequently Asked Questions

How can I avoid paying lenders mortgage insurance?

As is evident from this article, the way to avoid lenders mortgage insurance is to have a deposit of 20 per cent or more of the property purchase price.

20 Per Cent

Ways to save the 20 per cent deposit required could include asking your parents to chip in, finding a higher paying or secondary job, or allowing yourself more time to grow your deposit.

Some borrowers can avoid paying lenders mortgage insurance by borrowing more than 80 per cent of a property’s purchase price. This type of offer, however is only available to high quality, low risk borrowers, i.e. employed full-time in secure, long-term jobs with a stable housing history and evidence of genuine savings and no black marks against their credit file.

Does a family guarantee help me avoid paying lenders mortgage insurance?

Firstly, what is a family guarantee?

Well this is when a parent or close family member will actually lodge their home or property as equity support for a proposed purchase to help you avoid paying mortgage insurance. This is very effective in helping first home buyers enter the market but can also be used for clients wishing to buy an investment property.

The obvious benefit for this is the avoidance of paying LMI, however it must be noted that the guarantor’s property is then linked to the transaction until such time as the property’s value has increased or the loan has decreased back to an LVR of 80%.

What is difference between Lenders mortgage insurance (LMI) and mortgage protection insurance (MPI)?

Lenders mortgage insurance (LMI) covers your lender – the institution providing your loan – in the event you can’t make your repayments. If the lender needs to foreclose on your loan, then LMI covers the lender for any losses once the property is sold.

Mortgage Protection Insurance

Mortgage protection insurance (MPI) is a policy taken out to protect you if you are not able to make your mortgage repayments. Policies are arranged to cover your mortgage repayments in case you lose your job or suffer a serious illness, injury or even death.

In some instances, mortgage protection insurance may be tax deductible, particularly if you are taking it out for an investment property. We have a reliable, cost-effective insurance partner, so we can also help you organise an affordable mortgage protection insurance policy if you need one.

I heard that home loans also need to be approved by the LMI Insurer. Is that true?

Applications for home loans that lenders deem high risk have to be approved by mortgage insurers. This is because the LMI provider is taking the risk from the lender.

Conservative mortgage insurers require the borrower to have a credit history with no blemishes, a savings record and stable employment.

What do I do if my home loan has been rejected?

If your application for a home loan is rejected because of an LMI provider’s criteria, seek advice from your mortgage broker. You could apply for another home loan with a lender who self-insures or uses a different LMI provider.

How much can I borrow for an investment property?

How much you can borrow depends on your current financial status and is assessed on a number of factors including your income, savings, current financial commitments, credit history and living expenses.

What is a mortgage?

A mortgage is an agreement by which a person borrows money pledging a piece of property that he or she is buying as security. Further reading:

Intuitive Finance – the smart choice

Navigating property lending and handing LMI insurers isn’t easy.

First home buyer New

Having a professional team on your side could make all the difference to your success.

Now more than ever, you need investor savvy people working on your team.

The world of banking and finance can be a pretty daunting one for both novice and sophisticated investors and since our establishment in 2002 we’ve focused on providing outstanding service and business standards.

This approach was vindicated when we received the Finance Broker Business Award at the 2018 Mortgage and Finance Association of Australia (MFAA) Excellence Awards. For expert advice on lenders mortgage insurance, contact Intuitive Finance

Discuss your specific needs & formulate the right strategy for you. Get in touch to organise your complimentary 60min session today!

The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.

Andrew Mirams

Andrew Mirams

Andrew Mirams is the Managing Director of Intuitive Finance and is a highly qualified mortgage advisor who holds dual diplomas in Financial Planning (Financial Services) and Banking and Finance (Mortgage Broking). Andrew’s expertise covers all aspects of lending for a diverse range of applications – from first home buyer loans or property upgrader loans, property investor loans, expatriates and loans for self-employed. With almost 30 years of experience, Andrew has been acknowledged by the mortgage industry as one of its best performers with multiple awards including regularly featuring in both the top 100 mortgage brokers list and Top 50 Elite business writers. Andrew was voted Victoria's favourite Mortgage Broker at the 2015 Investors Choice Awards, and won again for the same category at the 2017 Better Business Awards. The team at Intuitive Finance has also figured prominently by winning the 2016 "Best Independent Office (<5 brokers)" and "Best customer Service" Awards, and more recently at the 2017 MFAA National Awards, they also took out the "Best Customer Service" Award, a recognition which speaks for itself! Visit Intuitive Finance for more information.
Andrew Mirams

2 Comments. Leave new

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Neil Fernandes
June 4, 2019 7:12 pm

Hi
Would like to secure a 90% Investment loan where LMI can be capitalised.

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Andrew Mirams
July 1, 2019 1:16 pm

Hi Neil,

Yes, this can still be arranged. Please feel free to contact us on 1300 342 505 to discuss or email us info@intuitivefinance.com.au and we can have someone look into your situation and scenario more thoroughly.

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