Definition of Lender’s Mortgage Insurance
If you borrowed more than 80% of the value of the property from a financial institution, you will be required to pay an upfront fee called Lender’s Mortgage Insurance or LMI. LMI is an insurance policy that protects the lender in the event the borrower can’t make the mortgage repayments.
While LMI may seem like it primarily benefits the lender, it actually benefits you too because without LMI you would be unable to get finance for your property purchase.
What affects the cost of Lender's Mortgage Insurance?
The amount of deposit you have as a proportion of the property value will affect the cost of your LMI. This is also known as the loan-to-value ratio or LVR. Generally, the higher the ratio, the higher the cost of LMI.
The cost can also vary depending on whether the deposit is made up of real savings or came from other sources such as a gift. Other than the size of the loan and the deposit amount, your loan purpose and the type of buyer you are can also have an affect. Homebuyers, refinancers and investors may be subject to different LMI rules.
Lender’s Mortgage Insurance premium is not refundable and not transferable. This means that if you decide to refinance your loan, you will have to take out new LMI if this is required by the policies of your new lender.
How is Lender’s Mortgage Insurance paid?
In many cases, Lender’s Mortgage Insurance premium is paid at loan settlement as a one off lump sum. If you wish to avoid having to pay LMI upfront, you can instead include this into your total loan amount and spread the cost of the insurance over the loan. Take note that if LMI is added to your loan amount, your minimum monthly mortgage repayments will marginally increase to cover the cost of LMI.
How to avoid paying Lender’s Mortgage Insurance?
LMI can help people buy a home who can’t afford to save a deposit. But this can be a hefty price to pay whether you decide to pay upfront or in instalments. To avoid paying for LMI, a deposit of 20% of the property value is required. There are plenty of ways you can grow your deposit. You can read more here on strategies on how you can save for a house.