What is Lenders Mortgage Insurance (LMI)?

The process of buying a house can be confusing for first home buyers, with so many different home loan features to consider before taking the plunge. 

Then there’s the hurdle of trying to save a 20 per cent deposit. There are many reasons why saving a 20 per cent deposit can be difficult – the current cost of living, you’re buying as a single, you’ve got a few extra mouths to feed or you’re still paying off a car loan for that sweet ride you bought back in 2020.   

But there is another way many people purchase their dream home each year without having a 20 per cent deposit or help from the bank of mum and dad – Lenders Mortgage Insurance (LMI).

What is LMI?

You wouldn’t be the first to wonder ‘what is Lenders Mortgage Insurance?’ when trying to secure finance for a home. Lenders Mortgage Insurance is home loan jargon that you may have heard your friends talking about. Don’t let this acronym confuse you – it’s a pretty basic concept to wrap your head around.

Since the late 1980s, LMI has given millions of Australians a footing in the property market when ordinarily, they wouldn’t have been given the opportunity. 

Simply speaking, Lenders Mortgage Insurance is a fee paid by the borrower (in this case, you) to protect the lender (the institution giving you the money) against any potential loss if you can’t repay your home loan.

A common question that comes up is: How much is Lenders Mortgage Insurance? The answer is the amount varies depending on how much you are borrowing; how big your deposit is and which lender you are a customer of. It can be paid upfront as a one-off fee or built into your home loan repayments.  

Here’s an example of how LMI works.

Let’s say you are going for a property that’s $800,000, but you only have 5 per cent ($40,000), 10 per cent ($80,000) or 15 per cent ($120,000) of the deposit instead of the standard 20 per cent ($160,000).

For an $800,000 property, your Lenders Mortgage Insurance will cost:

• 5% deposit = around $40,000 LMI
• 10% deposit = around $14,000 LMI
• 15% deposit = around $6,800 LMI

If you can’t afford the 20 per cent deposit but can afford the Lenders Mortgage Insurance (as a one-off payment or spread out across your monthly loan repayments) without scrambling your finances, it could be your ticket into the housing market.

Or perhaps you have the 20 per cent deposit but using it all would leave you completely skint with no safety net. Instead, you might decide to save some of that hard-saved cash for renovations or furniture shopping for the new digs.

How much is LMI?

So how is Lenders Mortgage Insurance calculated? As described above, if your deposit is less than 20 per cent of the property’s value, it means your Loan to Value Ratio (LVR) is more than 80 per cent. Borrowers with an LVR of more than 80 per cent are usually required to pay LMI, because it’s considered to be a higher risk for the lender.

Your LVR is a simple calculation of how much you need to borrow, against the value of the property. 

Here’s an example to show you how it works:

Edwina is dreaming of buying a $750,000 apartment. She has worked hard to save a 10 per cent deposit of $75,000. This means Edwina will need to borrow the other 90 per cent of the property value, or $675,000, from her bank. This is also known as her LVR.

Importantly, LVR isn’t just something new homeowners have to be aware of. It’s a metric used when refinancing a property too.

Extra things to know about Lenders Mortgage Insurance:

Just as you need to do your homework when choosing a lender, it is also important to consider the ins and outs of Lenders Mortgage Insurance before deciding if it’s the right choice for you.

Upsides of LMI:

• It can help get prospective buyers into the market sooner.
• It can be particularly helpful for single house hunters who have less borrowing power than couples.
• No guarantor? LMI can help you overcome the hurdle to homeownership without having a guarantor.

Downsides of LMI:

• It is an additional cost which can add up over the long run.
• LMI protects the lender (not the borrower) if there’s a default on the home loan.
• With a smaller deposit, your loan will be larger and will probably take longer to pay off.
• If you are paying LMI gradually through your mortgage repayments, then your repayment amount will be higher until the LMI is paid off.

If saving the 20 per cent deposit is an option and you have the time to save that extra cash, then paying the Lenders Mortgage Insurance might not make good sense to you. 

On the other hand, Lenders Mortgage Insurance can be helpful option for house hunters who are struggling to save a 20 per cent deposit. 

As with all financial decisions in life, take your time to weigh up the pros and cons before deciding for or against Lenders Mortgage Insurance.

Got questions about Lenders Mortgage Insurance?

Talk to one of our ME mobile banking managers to learn more about LMI, and what it might mean for your home buying process.

Find a mobile banker near you