Lender’s Mortgage Insurance (LMI) is a one-off premium that can be added to a home loan which ultimately works to protect the lender from risk. At the time of loan settlement, a payment will be made based on the quantity that you borrow from the lender, combined with the amount of your deposit. This sum will work to protect the bank from any future loss if repayments are unable to be made.
LMI will typically be arranged by your lender if you are borrowing more than 80% of your home’s value, but meet all other requirements and can help borrowers to buy a house sooner, with a smaller deposit. It is important to understand that LMI covers the lender, therefore you cannot make a claim under the LMI yourself, only your lender can do this.
Banks tend to require LMI for high-risk loans as it will protect them against any potential loss from the inability to make repayments in the future. Typically, when a buyer is borrowing over 80% of a loan from the lender, this is classified as ‘high-risk’, as there is the potential for a ‘shortfall’ in the event that you default on your home loan. A ‘short fall’ occurs when the proceeds of sale of the property are less than the amount borrowed from the bank, meaning the bank is unable to recover the total amount of money loaned to the borrowers.
How can LMI help me?
Particularly for first home-buyers, it is becoming increasingly difficult to obtain a loan from a lender, and Lender’s Mortgage Insurance can make it easier for you to secure mortgage finance. Because LMI significantly reduces the risk for the lender, they are more likely to lend to you without you having the full 80% deposit.
Without LMI, the lender may decide not to loan to you, even if you meet all additional requirements, which can delay your entry onto the property market. With housing prices rising astronomically due to the cost of living, many potential buyers are opting to pay LMI so that they can purchase property sooner, rather than waiting and finding that prices have increased exponentially.
LMI exemptions
Although LMI will be applicable in most cases if you are borrowing over 80% of your property’s total value, there are some circumstances where it can be waived if you meet strict and specific conditions. While this is rare, it is examined on a case by case basis and you could either receive a discount on your LMI, or have the fee waived completely.
Some exemptions from LMI include:
- If your loan to value ratio (LVR) is only marginally over the 80% threshold.
- Having a guarantor who is willing to secure their own properties against your loan.
- If you’ve saved more than the minimum deposit for your property.
- People employed in eligible professions such as doctors, lawyers, accountants, professional athletes, mining professionals and others.
How much is LMI?
The cost of your LMI will depend on a number of aspects including:
- Your particular lender
- The type of loan that you are choosing
- The size of your deposit
- The amount of your home loan
- The value of the property
- If you are a first-home buyer
- Which state your property is located in
- If the property is an investment or residence
- Your professional industry
Typically, your lender will provide you with the full amount of the LMI fee when you initially apply for your home loan. LMI can be a substantial expense and can potentially cost tens of thousands of dollars, so it is important to factor this cost into your overall budget when you begin to look to purchase a home.
Is LMI the same as Mortgage Protection Insurance?
Many home-buyers will ask the question about whether LMI is the same as Mortgage Protection Insurance (MPI). The key difference between the two is that LMI is in place to protect the lender in case the buyer defaults on their loan, whereas MPI protects the buyer in case of extenuating circumstances affecting upcoming payments, such as suffering from an injury or illness or losing employment. MPI is not compulsory, whereas LMI is introduced through your lender and can not be avoided unless you meet the criteria for exemption.
Weighing up your options when it comes to home loans and LMI is an important step in the buying process. The Victor Legal team has the requisite experience and knowledge to advise on all facets of property purchasing and can assist with navigating the process to secure your first home.
Trusted by our clients, we aim to develop an in-depth understanding of your home-buying needs, so that you’re able to enter the property market with confidence. We’re more than just Brisbane’s best conveyancers – we pride ourselves on our expertise and would love to assist you today!
Contact us for further information.
