More Risk to Banks More Cost to You
Lender’s Mortgage Insurance (LMI) is an insurance policy that protects the lender from financial loss if the borrower can’t afford to make their home loan repayments.
A financial institution can make a claim against the policy if the borrower defaults on the loan, and the sale of the property doesn’t equal the value of the mortgage (debt). LMI is applied directly to the borrower’s home loan, so while it’s not an upfront fee, the borrower does still pay for it.
When LMI applies
You’ll be required to take out LMI if your home loan deposit is less than 20 percent of the total value of your mortgage — although some lenders (especially now that the banks have tightened mortgage lending amid the fallout from the Banking Royal Commission), may require more than a 20 percent deposit in order to avoid paying LMI.
While the benefit to the lender is pretty clear — LMI protects them if the borrower defaults on their mortgage — there are also some benefits to the borrower, too. Some home loan products, for instance, will lend up to 95 percent of the property value, as long as the borrower tales out LMI.
There are a few things that affect the cost of lender’s mortgage insurance, including:
- The size of the loan
- The amount of the deposit
- Whether the property is an investment or owner-occupied
- If the borrower is a casual, self-employed full time employee
- The insurer used by the lender
Learn more about Home Loan Mortgages
How much LMI will cost
The size of the loan and the amount of the deposit are the two greatest factors influencing the cost of lender’s insurance. Generally, the greater the loan, the more expensive the mortgage insurance will be. Similarly, the smaller the deposit, the more you’ll pay in mortgage insurance.
Based on Rate City’s LMI calculator, if you paid a 5 percent deposit on a $300,000 property, you could expect to pay $7,752 in mortgage insurance; that rises to $26,163 for a property worth $600,000 with a 5 percent deposit.
It’s worth remembering that, besides paying LMI, you’re effectively borrowing the additional 15 percent of your deposit and paying interest on it. In the long run, this makes your property more expensive. And if you default on the loan repayments, you’ll still have to pay out the loan and the mortgage insurance you owe.
How to Avoid Paying LMI
You can avoid paying lender’s mortgage insurance a few ways, the most obviously being to have a deposit of at least 20 percent. Here are some other options you could explore:
- Have a family member go guarantor on the loan
- Shop around for another provider — the two largest providers are Glenworth and QBE
- Some occupations are seen as being at less risk of redundancy or job loss (see: the occupations listed in this Canstar article) — if you’re a dentist, doctor, lawyer, ask your lender to waive LMI.
When you go through the Property Investment Training Course you learn about your net earnings, borrowing capacity and other aspects of borrowing money to invest in property