How Lender’s Mortgage Insurance Can Help

Lender’s Mortgage Insurance may seem expensive, but sometimes there are real benefits for home buyers to pay for the lender to take it out. We explore why you might consider paying for it.

What is lender’s mortgage insurance?

Lender’s Mortgage Insurance (LMI) is insurance that protects the lender if you’re unable to pay back your home loan. A lender may require you to take out LMI if you’re borrowing more than 80% of the value of a property, known as a Loan to Value Ratio (LVR) of 80% or more. You can read more about LMI and LVR here.

If you can’t pay back your home loan, your property will be sold and money from the sale will first be put towards paying off your mortgage. If this amount doesn’t cover the full amount owing, LMI covers the lender for the difference between the sale price and the amount outstanding on your loan.

What isn’t lender’s mortgage insurance?

It’s important not to confuse LMI with mortgage protection insurance, as the two are very different. Mortgage protection insurance is a form of personal insurance that’s designed to meet the cost of paying your home loan if you get sick, lose your job or even die. If you meet the policy criteria, your mortgage protection insurance may pay a lump sum or cover the cost of your mortgage repayments for a period.

How can LMI help?

LMI helps in two key ways:

1. Before you can purchase a property without paying for LMI as well, you’ll usually need to have saved a 20% deposit. This equates to an LVR of 80%. But, depending on your lender, taking out LMI may allow you to borrow with an LVR of up to 95% if you’re an owner-occupier, or 90% if you’re an investor. That means you can purchase a property with as little as 5% of the purchase price – although you will still have to factor in stamp duty and other upfront costs.
2. LMI protects the lender, giving them the assurance that they won’t lose money if you can’t pay back your loan. This extra protection means lending to you is less risky and they have more freedom to offer a higher loan amount.

Because you can purchase your home sooner, LMI doesn’t just give you the chance to stop paying rent, you’ll also have the potential opportunity to take advantage of any capital gains in the property’s value if the market rises. Sometimes, this can more than offset the price you need to pay for LMI, especially in a rising market.

How much is LMI?

The cost of LMI varies depending on your personal circumstances and the level of risk involved in lending to you. Generally, an insurer will take into account:

• The amount of your loan
• The size of any deposit you’ve saved
• Whether you intend to live in the property or treat it as an investment
• Your employment status – for instance, whether you’re self-employed, full-time or casual.

Generally speaking, LMI typically costs more when you’re borrowing more, so the less deposit you have the more your LMI will be. Different insurers also have different cost structures, so your premium will vary from insurer to insurer.

When do you need to pay LMI?

If a lender requires you to take out LMI, they – or their insurer – may also ask you to pay the full cost of LMI upfront when you settle your property. But more typically the amount can be rolled into the total cost of your home loan so that you pay a little extra on each mortgage repayment.

Your mortgage broker or home loan provider will talk to you about setting this up when you start discussing your loan.