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4 things you need to know about Lenders' Mortgage Insurance
First-home buyers often ask us what Lenders' Mortgage Insurance (LMI) is. The next question is 'how can I avoid paying LMI?'. Fair enough – with conveyancing, taxes, moving costs and all the rest, you probably want to avoid any additional expense possible. Here's a simple guide to LMI and how to potentially avoid it.
LMI is an insurance that protects lenders, allowing them to take on a bit more risk and provide loans for borrowers with deposits lower than 20% threshold of a property's value.
If a lender requires a person to take out an LMI, it can typically be paid upfront or added to a home loan. LMI premiums are typically non-refundable which means if you switch your loan to another provider in the future, you generally won't be able to transfer your LMI to another lender.
This is even more likely to be the case if property prices have stagnated or dropped, which may mean the property's sale price is less than its original purchase price or valuation.
1. What is LMI?
LMI is a one-off insurance premium that protects the lender in the event that you default on your mortgage, and is usually payable by borrowers with deposits lower than 20%.
Even though the property itself acts as security for the loan, once default costs and interest are added, particularly in the early years of a home loan when fewer repayments have been made, the sale of a property may not be enough to cover the outstanding debt should a borrower default.
That's a pretty specific circumstance – unlike property value growth which, in most of Australia's capitals at least, is widespread.
"Everyone has seen what's happened in the last 12 months. Prices have moved so much, especially after we came out of the last lockdown. So, people want to buy now in case prices go up even more," says Georgia.
"We're anticipating that lockdown restrictions will ease at a time that's traditionally strong for the market. But if there's a lot of stock, then then it's possible prices might not move up so much. That just depends on how many sellers will enter the market when lockdown lifts."
2. How much will LMI cost?
The cost of LMI will vary based on several things, which may include whether you're an owner-occupier or investor, or whether you're a first-home buyer. The main consideration though is the property value and the deposit amount – the loan-to-valuation ratio (LVR).
Using the Genworth LMI Premium Calculator gives a good indication of LMI costs you could generally expect from one of Australia's largest LMI providers. In a hypothetical scenario it shows that a first-home buyer with a 10% deposit on a $1,000,000 property, who will live in the property as an owner-occupier with a loan term of less than 30 years, will pay $22,140 for LMI, or 2.21% of the total property value.
All other things being equal, a borrower with a 5% deposit will pay $39,923.75, or 3.99% of the total property value.
Generally, the lower the LVR – that is, the greater the proportion of the total property value that you're borrowing – the higher the LMI will be.
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3. What happens to LMI if you refinance?
LMI is lender-specific and not portable. This means that if you decide to refinance to a different home loan while you are still borrowing more than 80% of the property's value, you will most likely have to pay LMI again. This can often outweigh the benefits of refinancing.
4. How can you avoid LMI?
If you can afford to borrow less than 80% of the property's value, then you'll likely be able to avoid paying LMI.
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Save a deposit of 20% or more of the purchase price
This deposit will also need to include extra funds for other costs such as stamp duty and solicitor's fees.
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Gain a guarantor
Some lenders will accept a property owned by another person – for example, the borrowers' parents – as additional security. This arrangement might help borrowers avoid LMI.
However, there are some downsides to guarantees. Depending on the type of guarantee, the guarantors may be unable to use the equity themselves or sell their property. Also, if you default on your loan, their property could be at risk. Guarantors should obtain legal and financial advice of their own to ensure they understand the risks involved.
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Check your eligibility for government schemes
First-home buyers with a deposit between 5% and 20% who meet a range of criteria including income thresholds, may be able to access the Australian Government's First Home Loan Deposit Scheme, therefore avoiding paying LMI.
Additional schemes provide assistance to single parents or those purchasing newly built properties.
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Shop around
You're unlikely to avoid LMI in one form or another if you have a deposit under 20%. But you can find a lender that structures LMI to best suit you – whether as an upfront cost added to your total loan amount (meaning you'll be paying it off for the life of the loan), as a monthly premium, or as a margin added to your interest rate for as long as your LVR is under 80%.
Ready to take the next step to owning your own home? Speak with your broker.
This material has been prepared for information purposes only. This should not be taken as constituting professional advice. You should consider seeking independent legal, financial, taxation or other advice to determine how this information relates to your own circumstances.
