Lenders Mortgage Insurance (LMI) is an insurance cover that you may need to pay at the start of a home loan. Its purpose is to protect the bank or lender funding the loan from loss, which also lowers the risk of lending to you. If you default on your home loan and the lender needs to sell the property to recover the loan amount, LMI covers any shortfall between the sale price and what you still owe.
In these cases, your lender may recover the shortfall amount from the company providing the LMI. In some situations, the LMI company may try to recover the shortfall amount directly from you. In short, LMI protects the bank if you default. It does not protect you.
There is one significant way LMI may benefit you if you’re looking for a home loan – it could help you buy the property you want even if you don’t have 20% deposit, which is usually required by lenders.
Your lender may require you to pay LMI if your loan-to-value ratio is greater than 80%. Loan to Value Ratio (LVR) is a percentage that lenders use as a guide when figuring out how risky it is to lend you money to buy a home. If you have a deposit that’s 20% of the lender-assessed value of the property, it means you have an LVR of 80%, which most lenders accept without LMI cover.
If you have less than 20% – say even as little as 5% deposit – LMI may still allow you to borrow the amount you need to buy the property you want.
In the event of a default, the lender will sell your property. If the sale price doesn’t cover what you owe, LMI will cover the shortfall (although you’re still liable for the debt).
Lenders usually require a deposit that makes up 20% of the value they give a property that you want to buy with a home loan. The lender-assessed value of the property may not always be the same as the actual purchase price or the value a real estate agent or valuer might estimate for it. When valuing a property, we will use the lesser of either the assessed value or purchase price when calculating LVR.
So when you find a property you like, talk to your lender first about the assessed value and whether LMI will apply.
Your lender will talk you through how much it costs during the application process. The exact premium amount depends on how much you’re borrowing and your LVR.
You can estimate how much LMI you may need to pay using our LMI and Stamp Duty Calculator. Most lenders allow you to either pay the premium up front or include it in the balance of your loan (although this means you will pay interest on it over the life of the loan).
It’s important to remember that LMI is to insure the lender, not you. It allows the lender to recover the debt you owe from the company that provided the insurance cover. The insurance company may then recover the debt from you, if there is a shortfall after the property is sold.
Make sure not to confuse LMI with mortgage protection insurance, which helps you meet mortgage repayments if you become ill or incapacitated and unable to work.
There are several ways you could avoid paying LMI when applying for a home loan to buy the property you want.
The simplest way to avoid LMI is to save until you have a deposit that is 20% of the value of the property you want to buy (plus costs, including stamp duty).
Alternatively, you may be able to avoid paying LMI if you ask a family member to guarantee part of your loan. This means they are liable for the loan in case of default. At St.George, this type of loan is called Family Pledge.
Keep in mind that lenders use different insurers for their LMI cover. This may mean you get a range of different LMI estimates if you ask around and do your research.
LMI premiums are not transferrable. If you decide to refinance and switch to another bank, the LMI doesn’t move with your loan, meaning you may have to pay for it again with your new lender.
If you’re buying an investment rather than a property to live in, you may pay a higher LMI premium. Your employment status – whether you’re full-time, part-time or self-employed – could also affect how much LMI you pay (although not with us).
It really depends on what you’re trying to achieve in buying property with a home loan.
A bigger deposit will save you from paying the LMI premium. On the other hand, if you’ve found the home you want and believe the purchase price could rise before you save enough deposit for such a property, LMI may help you get into the market quicker.
Before you decide, make sure you do plenty of research.
Use our property market research tool to check sales trends and projected values for suburbs and houses you’re considering.
Also talk to your real estate agent and lender about what you could afford given your current deposit.
Alternatively, you could get started on your home loan journey right here, right now. Start the application and manage the process online – we’ll be available to guide you every step of the way via chat or phone you if you have any questions.
A home loan expert will call you once you have submitted your application to talk through next steps.
Enter details of your income and expenses to get an estimate of how much you could borrow and what your repayments might be for your investment property.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.