What is LMI (Lenders Mortgage Insurance)?

There are many reasons why saving a 20% deposit can be difficult – you’re buying as a single, you’ve got a few extra mouths to feed, or you haven’t walked past a 30% off sale sign since 2007.

But there’s also one reason that thousands of people are able to purchase their dream home each year without having 20% deposit – Lenders Mortgage Insurance (or mortgage lenders insurance).

How does it work and how is LMI calculated?

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 are unable to repay your home loan.

It can be paid upfront as a one-off fee, or be built into your home loan repayments – and the amount varies depending on the lender.

If your deposit is less than 20% of the property’s value, it means your Loan to Value Ratio (LVR) is more than 80%. Borrowers with an LVR of more than 80% are usually required to pay for LMI, because it’s considered to be a higher risk to the lender.

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

Take Ed, he’s dreaming of a $750,000 house in Prahran and has $75,000 saved for his deposit (10%).

This means that Ed will need to borrow the other 90% of the property value, or $675,000, from his bank. This is also known as his LVR.

Many people believe that lender’s mortgage insurance is designed to protect the borrower – but that’s actually mortgage protection insurance.

LMI vs extra savings?

LMI

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

Let’s say you are going for a property that’s $500,000, but you only have 5% ($25,000), 10% ($50,000) or 15% ($75,000) of the deposit instead of the standard 20% ($100,000).

For a $500,000 property, your LMI will cost:

• 5% deposit? LMI cost = around $15,000
• 10% deposit? LMI cost = around $10,000
• 15% deposit? LMI cost = around $5,000

If you can’t afford the 20% deposit, but can afford the LMI as a one-off (or add it to your loan) without scrambling your finances, it could be your ticket in.
Or you may actually have the 20% deposit, but would rather save some of that hard-saved cash for holidays, renovations or more of those 30% off sales.

Extra savings

At the end of the day, LMI is an additional cost – and can add up over the long run. If saving the 20% deposit is an option, then LMI is probably one less hurdle to jump in the race to get home.

There are serious legal obligations associated with being guarantor of a loan, so be sure to seek financial advice to fully understand those obligations.

In summary:

• LMI can be an ideal option for those who can’t save a 20% deposit.
• LMI protects the lender, not the borrower, if there’s a default on the home loan.
• It can be paid as a lump sum or over the course of the loan.

We’ve partnered with Helia to provide our customers with LMI - you can find out more about their product by reading this LMI Fact Sheet. To find out more about Lenders Mortgage Insurance, talk to a ME Mobile Banker.