LENDERS MORTGAGE INSURANCE
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) is an insurance that your home loan lender may require you to take up if you are borrowing more than 80% of the purchase price on your new property. This is to protect the lender in case the borrower is unable to pay off the mortgage repayments and the property needs to be sold.
You can either pay for Lenders Mortgage Insurance (LMI) up front when you buy your home, or you can capitalize it as part of your home loan.
How LMI Benefits the Borrower and Lender
Although LMI can be costly, it offers a number of benefits.
- An LMI policy will allow you to borrow as much as 95 percent of the property’s value. LMI also allows you to purchase a home with a smaller than average deposit.
- LMI will protect the lender in case the borrower fails to meet the mortgage repayments and covers situations where you need to sell the property before the mortgage has been discharged.
- In cases where the property’s selling price doesn’t cover the outstanding balance of the loan, the lender can claim the difference from the insurance company. Hence, you won't be liable for the outstanding balance.
There are many sources of information about Lenders Mortgage Insurance. Your first point of contact should be your mortgage broker or your bank, who can advise you on the LMI premiums. The premiums will depend on the loan amount and the features of the product. More on the premiums below.
On top of the premium, the total cost of LMI will include Goods and Services Tax and stamp duty. Your lender will include all these charges in their LMI package.
Depending on your situation, you may be eligible to claim a refund on your LMI. A partial refund may be available during the first two years of the loan. Ask your loan provider about the terms of the LMI and whether you qualify to claim a refund. More on refunds later.
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How Does LMI Work In Practice?
If the lender considers that there is a risk that the borrower will default on the loan, the lender might require the borrower to take out Lenders Mortgage Insurance. LMI is beneficial to both the lender and the borrower.
In most cases, the lender will only require Lenders Mortgage Insurance for loans of more than 80 percent of the property’s value. For a low doc loan, the lender may also require LMI for loan amounts with a loan to value ratio (LVR) of between 60 and 80 percent.
Factors that could affect the amount of LMI include:
- Deposit amount
- State of the property
- Property purchase price
- Loan to value ratio
- Whether the client is employed or self-employed
- Whether the property is owner occupied or is purchased for investment purposes
When is LMI Needed?
First off, you need to consider the type of loan you are planning to apply for, as well as your financial situation and proof of income.
- Are you employed?
- Do you have payslips to submit to the lender?
- Can you substantiate your income?
If you answered yes to these questions, you are likely to qualify for a regular loan. In this case, you will only pay LMI when your loan to value ratio is more than 80 percent.
If you are unable to provide proof of your income to the lender, or if you are self-employed and do not have tax returns to show, you may opt for a low doc loan. In this case, the lender can request LMI when the loan to value ratio is more than 60 percent.
How Much Does LMI Cost?
The amount of Lenders Mortgage Insurance will vary among lenders and insurers.
The type of property will also affect the cost of Lenders Mortgage Insurance. For an investment property, there is a standard loading for loans of around 20 percent.
Some insurance companies also charge a loading cost for self-employed borrowers.
As a rule, the higher the risk of default perceived by the lender, the higher the insurance premium will be. Hence, premiums will be higher for borrowers providing alternative or limited proof of income. Lenders will also pay higher premiums if the loan to value ratio is high.
In some cases, lenders will pay for the insurance. These cases include:
- When the LVR is less than 80 percent for a fully documented loan
- The loan is below 60 percent in a low doc loan
- Other circumstances at the discretion of the lender
You should ask your lender about their LMI policy to find out whether you will be responsible for paying for it.
If you are liable, the cost of LMI will depend on:
- The insurer
- The loading fees for high-risk borrowers
- Premium calculation
- The loan amount band for your loan
Most lenders include the Lenders Mortgage Insurance as part of the base loan. Some borrowers cap the maximum LVR at a certain percentage while others do not.
For loan amounts between $500,000 and $800,000, the difference in LMI premium between insurers can be as high as $12,000. It is therefore important that you always find out the cost of LMI before taking out a loan to avoid any nasty surprises later in the process.
In Australia, the main insurers are QBE and Genworth. Some lenders such as ANZ also self-insure their loan.
LMI vs No LMI – Which Is Better?
Most home buyers struggle with this common dilemma. Should you wait to buy a property until you have the required 20 percent deposit or just pay for Lenders Mortgage Insurance?
The answer will depend on the circumstances of the individual borrower and the future outlook for the movement of property prices.
By buying earlier in a bullish market with a lower deposit using LMI, you can buy before property prices increase and could save money on monthly outgoings by buying instead of renting,
If property prices in the area you are targeting are likely to decrease in the next years, you might be better off waiting until you can secure the 20 percent required deposit.
Buying a new property is a major financial decision. It’s essential to do your research and seek professional help if necessary to make an informed decision.
Can You Avoid Lenders Mortgage Insurance?
Yes, it's possible. One way to avoid paying LMI is to have a guarantor, even if you don’t have enough funds saved up for a deposit.
The guarantor is usually the parents of the borrower. They don’t necessarily have to guarantee the entire loan. However, it’s crucial for the guarantor to know what could happen to them in case you default on your loan payments.
Aside from these circumstances, the lender may waive LMI for up to 90 percent of the loan to value ratio for individuals in any of these fields:
- Medical practice
- Doctors employed by hospitals
- General practitioners
Professionals in the legal field, engineering, accounting, and mining may also enjoy a special waiver of LMI policies. The guidelines vary from lender to lender, so be sure to request details from your lender to see if you are eligible for any exemptions.
Is LMI Refundable?
Yes, you may be eligible for a partial refund of Lenders Mortgage Insurance during the first two years of your loan. Many lenders will not notify borrowers about this option which is why a lot of people miss out on these bonuses.
Most Lenders Mortgage Insurance will provide a refund to borrowers either directly to the borrower or indirectly through the lender if the loan is cancelled within the first 12 months.
When the principal and accrued interest are repaid in full, and there has been no default on the part of the borrower, a refund might be available.
The amount of the refund will vary from 40 to 50 percent of the original Lenders Mortgage Insurance premium during the first year. For loans less than two years, but more than one year, the refund is usually 20 percent of the original premium. There is no refund for stamp duty.
The insurance company can provide a refund after the first year since the risk of default is highest during the first 12 months.
There are also some cases where the borrower is not entitled to claim a refund, including:
- when the loan has arrears
- a loss eventuated
- refund amount is less than $500
- loan repayment has been made within a year of the mortgage’s maturity date
- insurer received notification of the policy cancellation within three months of the loan repayment
- there are separate arrangements for a reduced LMI premium with the lender
Is LMI A Cost Or An Investment In Your Future?
Buying a home is a major milestone in your life. It is also a significant investment, and you want to make the right decisions.
Property prices can be high, and you want to find ways to knock off some of the costs from the purchase price wherever possible. If you don’t have enough funds saved up or you don’t qualify for the loan with your current income level, you might have to pay for Lenders Mortgage Insurance.
Some people don’t like the thought of Lenders Mortgage Insurance. The definition of the insurance itself implies it is for the benefit of the lender and not the borrower. LMI premiums can be significant and can total around one to three percent of the loan amount.
However, it’s crucial to understand why this one-off payment may be beneficial to the borrower, not just the lender.
At first glance, LMI appears to be just another cost you need to incur when buying a property. However, it could also serve as an investment.
Without the LMI, the borrower would not be in a position to buy the property right away. Any delay might mean losing out on the chance to buy your chosen property.
Property prices might increase while you wait, and when you save up enough funds to cover the 20 percent deposit, the price of the property may already be higher than your previous budget. Paying for LMI at the outset could have saved you more money in the long run.
While it’s impossible to predict the future accurately, it’s always crucial to weigh up your options and consider the opportunity costs, not just the immediate costs related to the transaction.
Tools and Resources
Premiums for LMI can cost a lot, so it pays to know all the details before you proceed. Knowing exactly how much you will need to pay for Lenders Mortgage Insurance is important for anyone planning to take out a loan.
There are Lenders Mortgage Calculator available if you want to know estimated prices you have to pay. You will need to input details of the loan amount and size of deposit to do this.
Where Can I Find Out More Information?
It is common to have questions about Lenders Mortgage Insurance. Do you really have to pay for it? What are the benefits of paying the premiums? How much will the premiums be?
The best way to get more details is to go directly to your mortgage broker or lender with your specific questions.
Policies governing Lenders Mortgage Insurance vary from one firm to another. Lenders make separate agreements with the insurance companies who provide the Lenders Mortgage Insurance cover – this explains why the amount of premium can differ greatly between providers.
If the thought of applying for a loan and dealing with LMI overwhelms you, and you have no idea where to start, you can consult a mortgage broker. These professionals know all there is to know about home loans and lending policies that will affect the price of your loan.
A mortgage specialist will help you assess your borrowing capacity, and suggest lenders from their network that will, most likely, approve your loan.
Talk to Someone to Find Out More?
Are you ready to buy a new property? Whether you are an owner-occupier or a property investor, it pays to know everything you can about home loans.
Find a Better Rate provides a one-stop service to borrowers looking for the best home loans in Melbourne. Our team of specialists will assess your current financial situation and provide objective suggestions on which loan products suit you best.
During the process, our specialists will also discuss all the fees necessary to take out a home loan. We can also answer your queries about:
- Lenders Mortgage Insurance
- Loading fees
- Any government grants you can take advantage of
These are just some of the questions our mortgage brokers will help you answer.
Lenders Mortgage Insurance premiums should not deter you from deciding to buy a certain property. Paying for LMI may save you money in the long run. It is essential to get all the relevant information to enable you to make the right decision.
With the help of our mortgage specialists, you can be confident that you are making the best choice.
Information provided herein are for reference only and do not constitute professional advice. Your situation will be different from others, so it is best to speak with a mortgage broker or your bank to get the best advice for your situation.
Mortgage Broker Melbourne Victoria Australia © 2018 Mortgage Broker Melbourne
Official mortgage broker of www.propertyinvesting.com
Disclaimer statement: This page provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.