What is LMI?

As you can imagine, when a bank is lending hundreds of thousands of dollars in a single home loan, they want to make sure that the borrower is going to keep up with their mortgage repayments.

For banks and lenders, some home loans are higher risk than others, which is why they charge additional fees to offset the risk in the event that the borrower isn’t able to make their repayments.

What is Lender’s Mortgage Insurance?

Lender’s mortgage insurance, or LMI for short, is insurance that the lender takes out to protect itself in the event that you as the borrower can’t repay your mortgage. LMI is a one-off, non-transferable fee that’s either paid upfront or added to your home loan. That means that if you refinance your home loan with another lender before you’ve built up 20% equity in your property, you might have to foot the bill for LMI for a second time.

While LMI only covers the lender, not the borrower or the guarantor, the lender passes the cost onto you as the borrower. You can choose to pay the fee upfront, but most banks and lenders will add the cost of LMI to your home loan so you can pay it off over the term of your loan, but that also means that you’ll have to pay interest on the LMI amount.

When do I need to take out Lender’s Mortgage Insurance?

More often than not, banks and lenders will usually require you to pay LMI if your deposit is less than 20% of the property’s ‘lender-assessed value’. This is the value based on the lender’s assessment, which could differ from the asking price.

If you have a deposit of less than 20%, you’ll have a loan-to-value ratio (LVR) of more than 80%, which is often considered to be of higher risk to most lenders. With that said, different lenders have different rules and criteria around LMI, so when you apply for a home loan, they’ll be able to help you figure out how much LMI will set you back.

How Lender’s Mortgage Insurance works

LMI protects the insurer in the event that you default on your home loan and there’s a ‘shortfall’ from the sale. That means that the proceeds from the sale of your home aren’t enough to cover the outstanding loan amount that you still owe your lender. In instances like this, your lender might be able to recover the difference from the LMI provider, but even if they are able to recover the loss that doesn’t mean that you’re off the hook completely. The LMI provider could then come after you to recover their loss.

As an example, if you were to default on your mortgage the bank would eventually step in to sell the property if you weren’t able to come to a resolution. If your outstanding loan amount was $400,000 and the bank sold the property for $350,000, that would leave a shortfall of $50,000.

In this case, your lender would submit a claim with their LMI provider to cover the shortfall. In turn, the LMI provider could seek repayment of $50,000 from you as the borrower. Ultimately, LMI protects the lender rather than the borrower, but that isn’t to say that LMI doesn’t offer several important benefits to borrowers too.

Benefits of Lender’s Mortgage Insurance

While you might not think that paying thousands of dollars in LMI could possibly offer any benefits, it turns out there are a few advantages to taking out LMI.

• Buy a property sooner: saving for a home is tough but LMI can help you get into the property market sooner than if you had to keep saving towards a 20% deposit. LMI can help to make homeownership more accessible for potential buyers who are struggling to save a substantial deposit.
• Stop paying rent: by entering the property market sooner, you’re able to stop paying rent. That way you can start contributing to your own investment and watching it grow.
• Start growing your home equity: as you slowly start chipping away at your mortgage, the equity in your home will grow. During the time you own your property, you might be able to take advantage of asset appreciation, which can also help to grow your home equity.
• No need to rely on a guarantor: With LMI, there’s no need to worry about finding a guarantor to support your low deposit loan.

How much is Lender’s Mortgage Insurance?

The amount you pay in LMI depends on several factors, including:

• Your lender: different lenders often have different criteria for calculating the LMI,
• The size of your deposit: the bigger your deposit, the lesser the risk and the lower your LMI,
• The amount you’re borrowing: most lenders will take your loan-to-value ratio (LVR) into account when calculating your LMI. As the LVR increases, so does the cost of your LMI,
• Your employment status (EG. casual, part-time, or full-time): if you’re a full-time, salaried employee, chances are that banks and lenders will perceive you as less risky, which can affect your LMI premium,
• Whether the property is for residential or investment purposes: many banks and lenders view residential properties as less risky, so you might benefit from a lower LMI fee,
• The insurer: just like with regular insurance products, the premiums often vary across different insurance providers. The same goes when it comes to LMI too, and
• Where your deposit came from (EG. genuine savings vs gifted funds): a consistent track record of saving is generally considered less risky than if you were gifted your deposit.

As a general rule, the more you contribute towards your deposit the lower the cost of your LMI.

Whether you’re looking to learn more about the home buying process or refinancing your home, Unloan has a huge collection of resources and blogs to help you on your journey. Explore our blog today or head online to learn more about our great loan features.

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval; satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000. 

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

There are no fees from Unloan. However, there are some mandatory Government costs depending on your state when switching your home loan. For convenience, Unloan adds this amount to the loan balance on settlement.

* Other third-party fees may apply. Government charges may apply. Your other lender may charge an exit fee when refinancing.