The Keystart team debunk the what, where and how of lender's mortgage insurance (LMI) in this useful guide for homeowners. Learn more.
Lender’s mortgage insurance (LMI) is an insurance policy that protects a lender from financial loss if you are unable to meet your home loan repayments. If you go into default, that is if you can't pay your home loan, your home may need to be sold. If there is a loss on the sale, known as a shortfall, the lender may be able to recover that amount from the mortgage insurer.
It is important to note that lender's mortgage insurance does not protect you as a borrower, it only protects the lender.
It is a fairly standard banking industry practice to charge LMI if you are borrowing more than 80% of the purchase price of your home. This calculation is referred to as the loan to value ratio (LVR).
The actual amount of the LMI premium will vary based on the purchase price of the property and the amount you are borrowing from your lender (the LVR) and whether your employment status is permanent or casual. If you are able to, you can pay the premium up front otherwise it can be capitalised to your home loan amount, to be paid off each month.
Given LMI can cost thousands of dollars, this may represent a significant additional cost to your loan.
An example of LMI
Let’s assume you are looking at purchasing a home that is valued at $380,000 and have a deposit of $20,000, making your loan amount $360,000. Your LVR ratio in this case is 94.74%.
As this LVR is greater than 80% most lenders will charge you lender's mortgage insurance.
Based on an industry online calculator, your premium may be up to $13,428. If you choose to capitalise that premium into your loan, your loan amount would then be at $373,428 and you would be paying an extra $62.64 per month to cover that cost. While you can request that your lender stops charging you LMI once you have at least 20 per cent equity in the property, it may take you quite a few years before this occurs.
You can access LMI calculators online to determine your individual situation. Always confirm with a lender if LMI applies and how much the charge will be.
LMI also applies when refinancing loans. If the loan being refinanced does not have enough equity (the gap between the loan amount and the current value of the home), most lenders will charge LMI to refinance the loan.
A refinancing example
A couple have been paying off their home loan and have managed to pay a little extra each month. Their home loan is now at $360,000 and they are looking at refinancing with a different lender. Their home is valued at $410,000, giving them $50,000 equity in their loan. Their loan to value ratio (LVR) is now 84%. This is still higher than new lenders 80% LVR, so they will be charged lender’s mortgage insurance.
The couple can choose to go ahead and pay the insurance, or they may decide to wait a little longer until their LVR goes below 80%. Based on an industry LMI calculator, in this scenario, the LMI premium would cost $5,148.
At Keystart Home Loans, our vision is to make the dream of affordable home ownership a reality for more people. As we do not charge lender's mortgage insurance, this can represent a considerable monetary saving to you.
LMI is one of the many factors to be considered when considering finance options. Your needs and objectives, as well as other loan features such as the interest rate, fees and facilities need to be considered carefully. Keystart recommends seeking independent financial advice before making significant financial decisions.
The examples given are estimates and are provided for illustrative purposes only. Keystart recommends that you seek your own independent financial advice prior to making any decisions about your financial needs.
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