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Lenders Mortgage Insurance
Understanding Lenders Mortgage Insurance
Lenders Mortgage Insurance (LMI) is a one-off cost that lets buyers enter the property market with a smaller deposit. The trade-off is real, and worth understanding before you sign on.
Explaining Lenders Mortgage Insurance and alternatives
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is an insurance policy that protects the lender, not the borrower, if the loan goes into default and the property sale does not recover the outstanding balance. Despite the name, LMI does not provide cover to the borrower for missed repayments, illness, or loss of employment. Personal insurance products such as income protection and mortgage protection are separate from LMI and serve a different purpose.
This distinction matters because LMI is sometimes mistaken for insurance the borrower benefits from in the event of hardship. It isn't. The premium is paid by the borrower (usually capitalised into the loan), the policy is issued to the lender, and the protection runs to the lender.
When does LMI apply?
LMI applies when the loan-to-value ratio (LVR) is above 80%. In other words, when the deposit is less than 20% of the property purchase price. Below that threshold, lenders typically do not require LMI.
This 80% LVR threshold is an industry convention rather than a legal rule. A small number of lenders may have different thresholds for specific borrower categories (professional packages for medical practitioners, lawyers, and some other occupations sometimes waive LMI up to higher LVRs). The mainstream rule for most borrowers is the 80% threshold.
How much does LMI cost?
LMI premiums vary significantly. The main factors are the loan amount, the LVR (a 95% LVR attracts a higher premium than 85% LVR), the loan type (owner-occupier vs investment), and the LMI provider the lender uses. For most home loans, premiums fall in a range of one to four per cent of the loan amount, but published rate cards from the major LMI providers should be consulted for indicative pricing on any specific scenario.
The premium is most commonly capitalised into the loan rather than paid up front. Capitalising LMI increases the loan balance and the interest paid over the life of the loan. Some lenders also offer the option to pay LMI up front in cash. Each approach has implications for cash flow and total cost over time.
Alternative to paying LMI
First Home Guarantee scheme
The Australian Government, through Housing Australia, offers schemes that allow eligible first home buyers to purchase with a smaller deposit without paying LMI. The schemes have annual caps on places, income thresholds, and property price caps that vary by location. Eligibility and scheme details change regularly.
Saving a larger deposit
Reaching the 20% deposit threshold avoids LMI altogether. For some buyers, waiting another six to twelve months to save the additional deposit will save more than LMI would have cost. For others, especially in rising markets, the cost of waiting (in higher purchase prices) may exceed the LMI saved. The calculation is specific to the buyer, the market, and the property in question.
Should you pay LMI or wait?
The right answer depends on your circumstances. Paying LMI lets you enter the market sooner. Waiting to reach a 20% deposit saves the LMI premium but means more time saving and exposes you to whatever the market does in the interim.
The factors that typically matter are: how quickly you can realistically reach a 20% deposit at your current savings rate, how the property market in your area has trended recently, the size and stability of your income, and your tolerance for the additional loan amount that LMI capitalisation creates. There is no universal right answer.
Frequently asked questions
Does LMI protect me as the borrower?
No. LMI protects the lender if the loan defaults and the property sale does not recover the outstanding balance. The borrower pays the premium but does not receive cover from the policy. If you are looking for insurance that protects you and your family in the event of illness, injury, or job loss, look at income protection, mortgage protection, and life insurance, which serve different purposes.
Is LMI a one-off cost or an ongoing payment?
One-off. LMI is paid once at the time of the loan settlement, either as an up-front payment or capitalised into the loan balance. There are no ongoing LMI charges over the life of the loan.
Can I get the LMI premium refunded if I refinance or pay off the loan early?
A partial refund may be available in some circumstances, generally only if the loan is repaid in full within a relatively short window after settlement (often the first one or two years). Refunds are unusual outside that window. The specific refund terms depend on the LMI provider and the original policy.
Can I transfer LMI from one loan to another?
Generally no. LMI policies are tied to the specific loan and lender. Refinancing to a new lender at an LVR still above 80% will typically require a new LMI premium with the new lender, even if you paid LMI on the original loan. This is a real factor in deciding whether to refinance while LVR remains high.
Are some professions exempt from LMI?
Some lenders offer LMI waivers for certain professional categories under their professional package products. Medical practitioners, dentists, lawyers, accountants, and some other occupations are the most commonly cited. Eligibility, the LVR threshold for the waiver, and the package conditions vary materially between lenders and change over time. If you fall into a profession that may qualify, it's worth checking which lenders currently offer the waiver and on what terms.
How does the First Home Guarantee compare to paying LMI?
The First Home Guarantee allows eligible first home buyers to purchase with as little as a five per cent deposit without paying LMI. Where you qualify and where places are available under the annual cap, the scheme is generally a better outcome than paying LMI. Eligibility, income thresholds, and property price caps apply. Places are released in tranches and can fill before year-end.