How much is lenders mortgage insurance in Australia and when are you required to pay for it?
Several factors determine the cost; typically, the higher the risk you pose to the lender, the higher your fees will be. However, you might even be able to avoid it entirely.
Keep reading to find out what affects the LMI rates and what you can do to lower them.
What Is Lenders Mortgage Insurance
Lenders Mortgage Insurance (LMI) is an insurance policy that protects the lender from the risk of not fully recovering their loan balance. If the borrower defaults on their mortgage repayments and the property value cannot cover the outstanding debt, LMI allows the lender to recover the remaining home loan cost.
The LMI premium is a one-off, non-refundable fee that’s either added to your loan or paid during settlement. The fee cost varies depending on several factors, such as the amount of money borrowed and the loan-to-valuation ratio (LVR), to name a few.
That said, LMI is required if your home loan deposit is less than 20% of the property’s value. In that case, you don’t have a good loan-to-value ratio, as it is above 80%, which makes you a higher-risk borrower from the lender’s point of view.
How Much Is Lenders Mortgage Insurance in Australia?
LMI costs can amount to tens of thousands of dollars, depending on several factors that affect the lender’s risk assessment. Some of these factors include
The size of the loan
Typically the more you borrow, the more you’ll pay for lenders mortgage insurance. For instance, if the purchase price of the home is $1m and you plan to borrow $850,000, the LMI premium will come out to $11,564.
Alternatively, if the home you want to buy is cheaper, say $600,000 and you plan on taking out a $500,000 home loan, your LMI premium will amount to $4,613.
The purpose of the loan
Buyers of owner-occupied homes tend to pay less in LMI premiums than those interested in investment properties. To continue with the same example, if you are buying an investment property worth $1m and you are borrowing $850k, LMI premiums will amount to $13,298.
Which state or territory the property is in
Different states in Australia have different charges on your LMI premium percentage:
- SA: 11.0%
- VIC: 10.0%
- WA: 10.0%
- ACT: N/A
- NT: 10%
- TAS: 10%
- QLD: 9.0%
- NSW: 9.0%
To illustrate, a $850,000 home loan for a $1m property would cost you $12,681 in LMI premiums in Queensland, while you would be required to pay $11,564 on the same loan conditions in the ACT.
The size of your deposit
Here is a brief overview of how much you can expect to pay in LMI based on your deposit size
Note: These premiums are for first-home buyers (owner-occupiers) borrowing with a loan term of up to 30 years and excluding stamp duty.
Other factors that might affect the cost of LMI included your employment status (borrowers with full-time employment as more reliable and trustworthy), income and whether or not you are a first-time home buyer.
But how do I calculate the Lenders Mortgage Insurance cost?
The best way to get an idea of how much you will pay for LMI premiums is to use an online calculator. It’s also a good idea to consult a mortgage professional who can help you calculate the cost or advise you on how to avoid it.
How Is LMI Calculated on Loan Increases?
In the past, it was possible to increase your loan without having to pay too much in insurance. However, these rules don’t apply anymore.
Currently, if you decide to top up your loan amount after settlement, lenders calculate the LMI premium based on the total loan amount with the increase added to the previous loan. The fees you have previously paid are then deducted. Nevertheless, the increased loan size will directly affect the cost of the LMI.
As a result, some borrowers could benefit more from refinancing their loans with a new lender offering lower premium insurance rates.
How To Avoid Paying or Reduce the Cost of LMI
There are some methods that can help you avoid paying or reduce the cost of LMI. Here’s what you can do:
You might be interested in: How Much Can I Borrow for an Investment Property?
Compare LMI Quotes From Different Lenders
As mentioned, LMI rates vary from one lender to another. To be on the safe side, compare the conditions provided by a few lenders; you might find a lender offering discounts or even exemptions from paying the LMI.
Have a Guarantor
A guarantor is a person, usually a family member, who uses the equity in their home to help you secure a home loan. Typically, the equity must cover the required 20% of the deposit to avoid LMI costs.
However, note that the guarantee is legally binding, and in case you can no longer meet the monthly payments, the guarantor takes full responsibility.
If you are interested in finding out more about the guarantor’s different responsibilities and the difference between a guarantor home loan and a gifted deposit, read this insightful guide.
Apply for a Government Scheme
If you are a first-time home buyer but can’t save up for a higher deposit, you could take advantage of the First Home Guarantee Scheme.
This Scheme helps new home buyers apply for a loan with a deposit as low as 5% while avoiding LMI charges. The government, in this case, guarantees the amount you need to reach a 20% deposit.
Save Up for a Deposit
While saving enough money for a higher deposit can be challenging, increasing the amount you put down will reduce the insurance cost.
Further Reading: First-Time Home Buyer Loans With Zero Down in Australia
That said, it’s always best to have genuine savings when applying for a home loan.
Bottom Line
Even though the borrower covers the costs of LMI, this insurance policy doesn’t serve to protect them, but their lender. If you are required to pay for it, consider saving up as much as possible before taking out a loan. A higher deposit can significantly lower the fees, and if you reach 20%, you can avoid paying it altogether.
1. Is Lenders Mortgage Insurance a one-off payment?
Yes, LMI is a one-off, non-refundable payment that’s either added to your loan or covered during settlement.
2. Is mortgage insurance necessary?
If you borrow more than 80% of the property’s value, you are typically required to pay LMI. How much is lenders mortgage insurance in Australia though depends on the amount you borrow and the LVR offered by your lender.
