Getting a Home Loan in Australia if you're living overs...
29 Nov 2023
Buying a property without a large deposit could see you having to pay an upfront fee called Lenders Mortgage Insurance (LMI).
Lender’s mortgage insurance (LMI) in a nutshell, is insurance that protects the lender in the event the borrower is unable to make repayments on their home loan. If you have borrowed more than 80% of the value of the property from a financial institution, you will need to pay LMI. Even though it may seem like LMI only benefits the lender, it actually benefits the borrower too. Without LMI, you may be unable to secure finance for your desired property purchase.
Historically, lenders have not been willing to approve loans where the loan to value ratio (LVR) was higher than 80%, as it was considered too risky for the lender. The introduction of LMI means lenders can now approve home loan applications with higher LVR (90% for loans.com.au ) allowing borrowers to access finance so they can purchase property.
Lender's mortgage insurance is not to be confused with mortgage protection insurance, which covers borrowers for their mortgage repayments in case of unemployment, disability, sickness or death.
LMI is an insurance policy which covers the mortgage lender against any losses they may incur in the event the borrower can no longer make their mortgage repayments (an event known as a default on the loan).
LMI is only charged in instances where borrowers have smaller sized deposits to put down against their property.
While the deposit percentage used to trigger LMI can differ from lender to lender, the average figure in the Australian market is around 20% (eg. having a deposit of less than 20% of the property value would trigger LMI having to be paid by the borrower).
LMI helps thousands of people each year purchase a home who otherwise may not have satisfied individual lending criteria. Lenders usually provide borrowers with the option of either paying their LMI upfront or alternatively adding it onto their loan amount - which is sometimes referred to as 'capitalising' the fee.
Any home loan application where the LVR is higher than 80% results in LMI being required. How much the LMI costs will depend on how much money is borrowed for the home loan. Essentially, the higher the loan-to-value ratio, the higher the amount of mortgage insurance.
In the event the borrower defaults on their mortgage, the lender can recover what's owed to them by repossessing the property the home loan is tied to. If the value of the property has fallen, the lender can suffer a loss - this is the risk that LMI covers. As the risk of loss has been passed on to lenders mortgage insurance, lenders are more willing to approve mortgage applications at a higher loan-to-value ratio.
A loan-to-value ratio (LVR) is the value of the property in comparison to the amount of money being borrowed through a home loan and is calculated as a percentage. The LVR is used by lenders to assess the risk factor of a home loan. The lower your LVR percentage, the less of a risk that loan is to a lender. Conversely, the higher your LVR percentage, the riskier the loan is to a lender.
For many lenders, the sweet spot is an LVR of 80% (20% deposit).
LMI is calculated as a percentage of the loan amount and will vary on factors including your loan-to-value ratio and the amount of money you intend to borrow.
LMI costs can differ depending on the loan, the lender, and the LMI provider. The factors that determine the cost of your LMI can also include whether or not you have 'genuine savings', if you're applying for the First Home Owner Grant, or if you're self-employed.
LMI is considered a significant expense and something that borrowers will generally aim to avoid. Avoiding lender’s mortgage insurance is easy if you already have cash saved and existing properties, but for many Australians getting a deposit together in the first place is a massive hurdle. LMI is just another mountain to climb and an extra couple of thousand dollars that you may have to fork out in the home loan process.
Although this may be the case, without LMI, many first home buyers may potentially be locked out of the property market as they struggle to meet the requirements of 20% deposits.
There are some ways for you as the borrower to avoid paying LMI. These include:
Lender's Risk Fee: A Lender's Risk fee (LRF) is a fee charged by a lender instead of LMI. It will be charged when LRF is lower than the LMI premium. It is a non-refundable fee.
Leveraging employment: White-collar jobs including doctors, lawyers and accountants can qualify for waived LMI, given their high salary and professional employment history meaning defaulting is unlikely to occur.
Saving for a greater deposit: Saving for a greater deposit can ensure the LVR remains below 80% which means you don't have to pay LMI.
Family guarantee: This allows a family member to act as guarantor to secure your deposit, so you have a bit more breathing room in terms of borrowing power. This can reduce your LVR to under 80%, which means you can avoid paying LMI on top of your deposit.
Purchase in partnership: If you want to scale the runs of the property ladder and you don't have a 20% deposit on your own, you could partner with a partner, sibling or friend and purchase a new home as a joint venture.
Apply for First Home Loan Deposit Scheme: If you, or you and your partner, are both Australian citizens, you can buy your first property with just 5% deposit and zero LMI, courtesy of the Federal Government. Eligibility for the scheme depends on where you are buying, your income and the value of the property you are buying. The scheme is limited to 10,000 places each year.
Substitution of security: A substitution of security can help swap the security on your current loan to the home you intend to purchase. This only applies to people looking to buy a new property and sell an existing one at the same time.
LMI costs at least a couple of thousand dollars in the vast majority of cases, but that’s a low-point. It can easily cost upwards of $10,000 or even $20,000, depending on a number of factors:
The cost of the house
The size of your deposit
Whether you’re a first home buyer or not (this can make it more expensive)
The length of your mortgage
And other factors such as your age and employment status.
The table below displays a breakdown of what LMI can cost based on a 30-year home loan for various LVRs (loan-to-value ratios) and property costs.
|Estimated Lender's Mortgage Insurance (LMI) Premiums|
|Estimated property value||95% LVR||90% LVR||85% LVR|
|$200,000||$ 5,643||$ 3,024||$ 1,649|
|$400,000||$ 14,174||$ 7,668||$ 4,284|
|$600,000||$ 28,557||$ 14,634||$ 7,344|
|$800,000||$ 38,076||$ 19,512||$ 9,792|
|$1,000,000||$ 47,595||$ 24,480||$ 12,325|
Source: Genworth LMI premium estimator. Prices including GST but excluding stamp duty. Based on a loan term up to 30 years.
So as you can see, LMI can be extremely costly, and if you do have to pay it, it can add thousands extra to the cost of your loan.
LMI can be paid upfront as a one-off fee, but if it’s too expensive, you can also capitalise it into the loan and pay it off as a part of your regular mortgage repayments (this would mean the LMI fee would also accrue interest).
The costs above exclude stamp duty on the LMI premium, which is different from stamp duty charged on the purchase of a property. Depending on which state you live in, you can also be charged a percentage on your LMI premium:
Remember to factor in stamp duty on LMI when budgeting for your new home purchase, as it can be an extra few hundred or even a few extra thousand dollars on top of your loan.
In many cases, Lender’s Mortgage Insurance premium is paid at loan settlement as a one-off lump sum. If you wish to avoid paying LMI upfront, you can opt to include this into your total loan amount and spread the cost over the life of the loan.
Take note, if LMI is added to your loan amount, your minimum monthly mortgage repayments will marginally increase to cover the cost of LMI.
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