Everything You Need To Know About LMI

Conversations around Lender’s Mortgage Insurance (LMI) may be becoming more common during the loan application process yet it’s also often one of the most misunderstood facets of finance. Let’s take a look at what it is, who pays it and why.

What Is Lender’s Mortgage Insurance?

Lender’s Mortgage Insurance or LMI is an insurance paid by a borrower that a lender takes out in order to insure itself against the risk of not recovering the loan balance should the borrower not be able to make the required repayments. It can be common for first home buyers to have to pay for LMI. The key take away from this is that it covers the lender not the borrower.

Who Pays LMI?

An LMI premium is normally payable on loan applications that do not have 20% or more in equity and can be payable on both purchase and refinance applications. There are lenders who waive the LMI premium for applicants who are members of certain professions such as doctors, lawyers and accountants under certain policies.

Why Would You Pay LMI?

With housing affordability being an issue for some potential home owners, the often sizeable LMI premium actually represents the difference between getting into a home or not. As the amount in most instances can be fully added to the loan amount there is no need to pay for it upfront.

How is LMI Calculated?

The LMI premium is calculated as a percentage of the loan amount and in accordance with the overall Loan To Value ratio, or LVR (i.e. the percentage of the property value you are borrowing). For example, if there are two borrowers with a base loan amount of $300,000 but one has an LVR of 81% and the other is at 90%, the latter can expect to have a greater premium. Your mortgage broker will be able to estimate what LMI costs will be applicable prior to your loan application being submitted.

The other cost associated with having a loan that’s in LMI territory is that many lenders price their loans relative to the LVR, with high LVR loans usually being more expensive. This can be a consideration when choosing a lender but if your only option is a bank with a higher interest rate, your mortgage broker will work with you to adopt a loan repayment strategy to pay the loan down and refinance to a cheaper rate once you are below 80%.

Will I Pay LMI if I Refinance?

If you have paid an LMI premium on a loan application this is usually a nonrefundable one off payment applicable to the loan being sought with that lender. If you choose to refinance you may stand to be charged another LMI premium should your LVR still remain over 80%. Your mortgage broker may be able to help you decide if taking out another LMI premium is worth it if you are considering a refinance. In many instances it may not be beneficial, but if the incoming lender is offering a more competitive deal that stands to be more cost effective in the long run then it may be worth considering. However most borrowers choose to wait until they gain enough equity to avoid LMI whether it be through capital growth or by paying down the loan.

Lender’s mortgage insurance is a relatively straightforward component of taking out a mortgage and with the guidance of your mortgage broker you will be able to understand how and why it may work for you.